How Much Will It Cost You? With Dynamic Pricing, Online Sellers Say "It Depends"

Variable pricing based on market timing, inventory and profit margins is nothing new for business. Airlines, hotels and restaurants have long employed "yield management" techniques to maximize revenue. But pricing changes are now coming far faster and affecting more products and services. And retailers are beginning to flirt with new factors like identity-based pricing, where what you pay is based on who you are.

A new report from the Wall Street Journal reveals the details of online competitors' pricing strategies, watching up to nine changes in price within one day for a General Electric microwave oven.

"Sellers on Amazon.com Inc. changed its price nine times in one day, with the price fluctuating between $744.46 and $871.49, according to data compiled by consumer-price research firm Decide Inc… Best Buy Inc. responded by lifting its online price on the oven to $899.99 from $809.99 after the Amazon prices rose, then lowering it again after Amazon prices for the oven dropped," the article reported.

This practice, known as dynamic pricing, is increasing in frequency as online retailers jockey for position on price monitoring sites like Pricegrabber and Nextag and within meta-commerce portals like eBay and Amazon itself, where merchants position prices against each other to gain coveted promotional spots that can drive sales.

Yield Management ≠ Dynamic Pricing

Because of these rapidly moving prices, many observers liken this phenomenon to the "yield management" techniques popularized by airlines, hotels and even restaurants (see How Airline-Style Yield Management Could Save Daily Deal Sites). While these practices may appear identical to the consumer, the business motivation behind the price shifts are much different.

Yield management is a business practice used for resource-limited goods and services, such as a spa appointment or a hotel room or a table at a restaurant. There is a finite supply of these goods and services throughout any given day - and the slots become worthless if left unfilled. Because the spa, hotel or restaurant has to stay open and keep staff paid for the entirety of their business hours, the more resources that get used, the better. Yield management has one specific goal: getting customers to buy a resource that might otherwise go empty - like an airline seat - at the highest possible price.

When a plane flies, it's going to fly no matter how many seats are filled. That means every empty seat on an airliner (no matter how much appreciated by flyer in the next seat), represents a loss for the airline. Better, the carriers reason, to have a passenger pay something, even if it’s less then the optimal fare, than get nothing at all.

The Dynamic Pricing Difference

Enter dynamic pricing. Depending on when the passenger bought the ticket, the airline’s yield-management algorithms will have adjusted the fare to ensure that the carrier leaves as little money on the table as possible.

For retailers, the motivation behind dynamic pricing is a bit different. The object of their game is to get as many goods out the door and into customer's hands as possible, while making the maximum profit. But other factors come into play. Unlike brick-and-mortar retailers, which can sometimes worry less about competitor pricing if that competitor is located all the way across town - too far for customers to make the trek just to save a few cents - online sellers have to treat every ecommerce site as a potential competitor.

Thus, shoppers will often see prices adjusting for various goods as sites like Amazon and Best Buy try to keep their profit margins as high as they can, while also grabbing customers from each other.

To get an idea of how much these prices shift around, the owner of one price-watching portal site, Digital Folio, tracked one camera's price rises and falls over a ten-day period and reported his results on YouTube. Not only did Patrick Carter track a lot of price movement for the camera, but he noted that many of the shopping portal sites like Pricegrabber and Nextag had trouble keeping up with the changes and often reported inaccurate results.

 

 

Dynamic pricing is slowly making its way into more and more aspects of consumer's lives. YieldStar and Rainmaker are software products that enable landlords to apply dynamic pricing to rental properties, based on yield0management principles. Major league sports teams are also using dynamic pricing to sell more tickets, avoid empty seats and maximize the revenue that goes to the teams, not to scalpers.

The Rise Of Identity-Based Pricing

Dynamic pricing doesn't just take the business and its competitors' margins into account. Online commerce sites are also experimenting with identification-based pricing, which prices items based on what is known about the customer, such as their buying history and browsing behavior. This can have both good and bad implications for the shopper.

On the plus side, if a site recognizes that this is the umpteenth time the same customer has window shopped for a particular item, an algorithm may try a lower price, just for that customer, to see if that will close the sale.

But if the site notices the customer has a history of buying high-priced items, it might presume they're willing to pay more for a given item and offer higher prices or more expensive choices, as Mac-using Orbitz customers learned to their dismay this summer.

Using identification-based pricing carries risks for retailers, too. A 2004 article in the Journal of Interactive Marketing revealed that "consumer perceptions of trust, price fairness, and repurchase intentions were more favorable to the firm when using a purchase timing tactic than when using buyer identification to offer different prices to different segments."

Consumers, the paper's authors concluded, trusted price changes made by an ecommerce website when it was done based on timing or other business-related reasons, because that was perceived as fair and understood as the way businesses work. But when it came to the identity of the consumer affecting prices, shoppers quickly became uncomfortable.

But given today's emphasis on mobile transactions and personalized shopping - not to mention increasing online competition and margin pressures - identity-based pricing isn't likely to go away. Look for more and more retailers to gradually expand dynamic pricing criteria beyond timing and inventory to who is the customer. It won't make privacy advocates happy, and it could scare off shoppers in the long run, but in the current economy, it will be hard for e-tailers to resist anything that boosts profits right away.