Dubai: When shopping online, have you ever noticed prices changing from one visit to the next? These prices change based on your behaviour during the previous visit to the website – regardless of the sector.
For example, if you look at an item a second time, the site assumes you have a greater desire for the product and increases the price. They hope that you, like most consumers, don’t have the time to shop around.
So, in other words, shopping online to save time can actually cost you more money than you thought, and not just in shipping and handling fees either. In fact, you might be charged more for an item online than someone else shopping at the same website for the same item at the same time.
How could this be? It’s something called ‘dynamic pricing’, here’s what it means
How ‘dynamic pricing’ is set by buyer preferences
So, ‘dynamic pricing’, also referred to as surge pricing, demand pricing, or time-based pricing, is a pricing strategy companies use to change costs on the fly based on circumstances and estimated user demand.
At its core, the idea behind the pricing model is to sell the same product at different prices to different groups of people. Retailers use dynamic pricing because it allows them to stay up-to-date on competitor pricing, pricing trends and avoid getting left behind the competition.
However, Ajay Dayal, a Dubai-based retail consultant explained how some companies avoid dynamic pricing because they fear consumers will misinterpret oscillating prices as manipulation.
“At the end of the day, consumers decide whether to make a purchase. It's up to the business to set the price we're willing to pay. If consumers are willing to make a purchase, then their need is met.”
What other industries practice this pricing strategy?
Online retailers, in particular, adjust the price of products according to competitors, time, traffic, visitor-to-buyer conversion rates, and sales goals. Apart from retail, ‘dynamic pricing’ is a common practice in several industries such as hospitality, tourism, sports and entertainment.
“Each industry takes a slightly different approach to dynamic pricing based on its customer needs and the demand for the product. Currently, most of the airline industry operates on a ‘dynamic pricing’ model,” explains Abu Dhabi-based retail consultant Maddy Ivan.
“When high demand coincides with short supply, then airlines charge more for the tickets. After seeing success of this in selling airline seats, many other verticals within the travel and tourism industry adopted the practice.”
Dynamic pricing is now also the norm for hotels, car rentals, and more, and users have largely accepted the practice as commonplace. Beyond travel and tourism, surge pricing was most recently used by rideshare and delivery apps globally, with customers paying more for a trip made in peak travel times.
Time-based pricing is the standard method of pricing in the tourism industry. Higher prices are charged during the peak season, or during special event periods. Hotels use dynamic pricing to adjust the cost of rooms and packages based on the supply and demand needs at a particular moment.
Some professional sports teams use such pricing structures to boost revenue. Outdoor sports factor weather into pricing strategy, apart from the date of the game and the date of ticket purchase. Game tickets in bad weather will sell better at a lower price; and when a team is on a winning streak, fans will pay more
What is the use for such real-time pricing strategies?
“Everyone enjoys getting a good discount. But, while offering discounts may make customers feel good about purchases made, data suggests using unnecessary discounts can have a negative impact on nurturing loyal customers,” said Dayal.
One recent study showed that 80 per cent of consumers consider pricing as a major deciding factor when shopping online, while another recent study found that 70 per cent of respondents follow brands on social media, with more than half of them doing so only to receive discounts and incentives to buy, while the rest stay away entirely.
“Although prolonged periods of discounts or simply unnecessary offers can negatively impact future sales, they can be used effectively in discretely providing a dynamic price to customers where the original price for a product or service is reduced with the aim of increasing traffic and driving up sales quickly,” Dayal added.
"People are drawn to lower prices because consumers love feeling as if they are scoring a good deal, but it also creates a sense of urgency that might drive more customers to convert. This is when dynamic pricing comes into effect. But it is not only implemented when you frequently visit a website, it's also affected by other external factors as well."
Market trends, social movements, regulations, competitors’ performance can all affect customer demand, which ultimately will determine product prices. Knowing customers’ shopping habits also allows businesses to work out a pricing formula that maximises their profitability.
While offering discounts may make customers feel good about purchases made, using unnecessary discounts can have a negative impact on nurturing loyal customers
How does one work around surge pricing strategies
There’s nothing worse than thinking you scored a great deal on something, only to find out someone else paid even less. But it happens more and more because online retailers are using data to change prices on the fly for individual customers.
So as more businesses adopt dynamic pricing -- the quick rise or drop in prices based on demand – the places that use this pricing strategy will hike up costs during peak seasons or the holidays. “It might sound like bad news for consumers, but you can still find deals, if you’re aware,” Ivan added.
• Know if the portal you’re dealing with practices such pricing
“The first step is to figure out whether or not a venue uses dynamic pricing. Any place that has a set amount of seats or capacity, such as theaters or theme parks, is more likely to use dynamic pricing,” evaluated Ivan. “But more importantly, retailers are accountable to revealing this to customers.”
“Luckily, many will tell you on their website that they use dynamic pricing. So do an Internet search for either ‘dynamic pricing’, ‘surge pricing’, ‘demand pricing’, or ‘time-based pricing’. Some shopping websites, for example, has a page online answering questions about how their pricing strategy works.”
• Planning ahead of time means getting cost-effective tickets
Waiting until the last minute to buy tickets means you’ll pay more, and the earlier you purchase a ticket – be it airline or to a show, prices drop more than usual.
“When it comes to entertainment events like concerts, theater events or food festivals, most venues will post ticket prices months ahead of time, and they’ll rise as the dates get closer. So plan ahead of time,” added Ivan.
• Know which holiday purchases you can afford to postpone
Holidays and weekends mean higher prices. Expect higher ticket prices on and around the holidays. If you must attend that day, try to buy tickets far in advance.
“You can avoid purchases or schedule them, only when it comes to airline or tickets to a show. But when it comes to buying at retail outlets in the holidays, it implies missing out on sales. While sales can be an ideal time to shop, beware of offers that are falsely advertised as cost effective,” Ivan said.
• Online shopping often offers better deals than physical outlets
When a venue uses dynamic pricing, those that pay online will usually get the better deal, Ivan opined, while adding that being aware of dynamic pricing when shopping is always an added advantage for especially those looking to score great deals.
“There have also been instances, when you show up at events without a ticket you will likely pay more at the gate. In such cases, buying ahead of time online is always the budget-friendlier of options.”
While a store will simply charge consumers the cost required to produce a product plus a predetermined amount of profit, it only considers internal information when setting the price and does not factor in external influencers like market reactions, the weather, or changes in consumer value.
The above-mentioned pricing tool can make it easier to update prices, but will not make the updates often if the user doesn't account for external information like competitor market prices.
Due to its simplicity, this is the most widely used method of pricing with around 80 per cent of global retailers, surveys show.
Although prolonged periods of discounts can negatively impact future sales, they can be used effectively in discretely providing a dynamic price to customers
However, even though it’s widely used, the usage is skewered, with companies facing a high degree of competition using this strategy the most, on the other hand, companies that deal with manufacturing tend to use this strategy the least.
Dynamic or surge pricing is particularly popular in industries in which demand changes throughout the day or where suppliers want to offer customers an incentive to use a product at a certain time of day.
“Some critics of 'surge pricing', say it is a form of price gouging. Dynamic pricing is widely unpopular among consumers as some feel it tends to favour particular buyers,” Ivan added.
”While the intent of surge pricing is generally driven by demand-supply dynamics, some instances have proven otherwise, and this is why retail giants have suffered severe backlash for their dynamic pricing practices. So the only amicable solution is to treat each offer prudently and on a case-by-case basis.”