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Dynamic pricing may not be for you

A favourite trick journalists play when they want to embarrass politicians is to ask them the price of a litre of milk. Politicians don’t know. Who does know the price of a litre of milk – it varies between retailers and it varies from month to month. Prices have for ever gone up and down according to supply and demand. Price is a critical component of a company’s offer and it can be the component that really pisses us off. This is especially so nowadays given something called “dynamic pricing”.

Dynamic pricing isn’t new. It is the reaction of a retailer to the demand for a product. An umbrella languishing inside a shop on a sunny day might be priced at £6.99. In heavy rain, on that same evening, the shopkeeper may move the bin of umbrellas outside the shop and price them at £9.99. The shopkeeper has dynamically reacted to a change in the value placed on the product.

This is all well and good when we don’t know the price of the product. Who knows the price of an umbrella on a sunny day? However, we all can place a value on the umbrella when it’s raining and undoubtedly it will be high. It is the same with seats on an airline. They are cheap when you buy them months in advance or when nobody else wants them and they increase in value during prime holiday time. We seem to expect this.

What would stick in the craw would be if, during a night out in your local, the price of beer suddenly surged after 8 PM. You might think that this wouldn’t happen but at the Coach House pub in central London on a busy work night, the price of a pint of beer can change by 20p during an evening. It is what we have been talking about with umbrellas and aircraft seats and it is now in danger of affecting the price of our drinks. In 1999 Coca-Cola experimented with a vending machine that automatically raised the prices for its drinks in hot weather. At the time the chairman and chief executive of the company described how the desire for a cold drink can increase during a sports championship held in the summer heat and his view was "so it is fair that it should be more expensive. The machine will simply make this process automatic".

The Coke CEO was right about the theory but we think he may be wrong about the practice. The fact that Coca-Cola hasn’t gone on to use this technology in their machines in the intervening years suggests that they can see the pitfalls. Price is a critical component of the products we buy and therefore something that delivers an important dollop of customer experience. If we feel that we are being exploited by conditions beyond our control and that we are being taken advantage of, it almost certainly will cause dissonance. When we buy something we make the assumption that the price has been pitched at a level that produces an acceptable profit for the supplier and makes sense to us as consumers. When that price changes to take advantage of a surge in demand that is out of our control, we see the supplier as greedy. We may on occasions buy the product but we may do so only because we are hostage to their luck. When conditions return to normal we may very well remain angry and shun the brand.

As we have said, dynamic pricing has always been with us and it always will be. However, it would be a step too far if suppliers believe they can use it to boost their profits. It works with products and services that we can ruminate about. We can take our time to decide whether we want to pay for that expensive flight or pay a small fortune to see our favourite singer on stage. We may not like the surge in prices but at least we can choose not to do the deal. It could be a step too far if manufacturers and suppliers of basic goods try to exploit us in a time of need.


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