Dynamic pricing has been around since Eve sold an apple to Adam. Also known as targeted pricing, flexible pricing, personalized pricing, contextual pricing and tailored pricing, dynamic pricing is the concept of setting variable pricing for a product, based on what the consumer is willing to pay (or reservation price). Thanks to advances in technology over the past decade, online retailers have been testing dynamic pricing with greater frequency. As consumers become increasingly aware, they are voicing concern, frustration and anger at online retailers utilizing a pricing tactic that can also be considered price discrimination.
Historically, dynamic pricing has been generally accepted by consumers, at least in certain situations. Vendors in marketplaces in the Middle East and Asia have used the tactic to maximize profits for thousands of years. More recently, deregulation of the airline industry in 1978 created an opportunity to test dynamic pricing on a large scale. Car rentals and hotels followed suit shortly after. Any industry that faces a high set of fixed costs and relatively low variable costs (i.e. books and movies) are also ripe for dynamic pricing.
The practice of dynamic pricing does have supporters. Consumers can benefit from discounted prices (think Priceline). Business owners, shareholders and employees agree that maximizing profitability is a corporate obligation. According to consulting firm Accenture, increasing prices by just 1 percent can result in operating profit improvements of 11 percent or more, as long as sales volume doesn't drop. A pilot program by Digonex Technologies for Warner Brothers boosted the bottom line for selected music titles by over 15 percent. Digonex also claims they raised relevant revenues by over 20 percent, and elevated sales volumes by over 35 percent.
With such compelling numbers, e-retailers are lining up to test dynamic pricing. In mid-2001, InfoWorld announced that IBM, Compaq, Hewlett-Packard and Dell were all looking into dynamic pricing approaches for their e-commerce operations. A few years later, Amazon was accused of dynamic pricing on DVDs, which it explained as a “limited price test.” The incident caused created uproar with consumers, despite the fact the test involved discounted prices rather than premium pricing.
Fueled by consumer concern, the legality of dynamic pricing was challenged in court. In 1996, a class action lawsuit was filed against Victoria’s Secret (for offering lower pricing in catalogs sent to men). The case was thrown out, setting precedent for online retailers. At roughly the same time, advances in data collection, management and analysis enabled e-retailers to change pricing real-time, based on a variety of shopper variables commonly associated with “cookies” on the user’s computer. Variables considered relevant in setting prices dynamically might include past purchases, frequency and duration of previous visits, source of visit (inbound link), pages visited, the location of shopper’s computer and time of day or week of the visit.
Despite the legality and general acceptance in a capitalist society, consumers and advocacy groups are concerned that adoption of dynamic pricing provides retailers with an unfair advantage (as opposed to a gold vendor at a neighborhood souk) in terms of scale and impact on security and privacy. Consumers are also voting with their wallets. According to a recent ForeSee Results report of e-retailers, pricing is leading the way in the dissatisfaction category for consumers. That dissatisfaction could turn into negative reviews, press and even boycotts, if not managed well by retailers.
Retailers and consumers do have options, however. Retailers can proactively communicate the value associated with dynamic pricing, which may include discounts (think last minute airfare). Consumers are getting help from the federal government, which recently announced the Do Not Track program. Not surprisingly, marketing and other business-related industry organizations are opposed to the legislation, preferring self-regulation. Retailers and technology vendors argue that dynamic pricing is legal and fair, if not essential in today’s economic environment.
Consumers looking to avoid the downside of dynamic pricing have additional options. For starters, they can do homework: comparison shop or conduct research via multiple machines at different locations. Those lacking the patience or time can delete or disable cookies, or browse in private/incognito mode on Google Chrome or Firefox browsers respectively. In the end, however, the issue is much larger and requires education and further dialog on both sides of the table. Only time will tell if retailers are able to sufficiently address consumer concerns about dynamic pricing.
Sources for this article include: Christian Science Monitor, ConsumerWebWatch, InformationWeek, Virginia Journal of Law & Technology and Free Encyclopedia of Ecommerce.
Personally, I think that consumers are becoming far too savvy for the majority of ecommerce sites to effectively utilise a dynamic pricing system. For this kind of tactic I believe that it actually pays to be a smaller site, as Amazon and co wouldn't get away with it for a second.