The concept of dynamic pricing has received a great deal of attention in recent years due to its prevalent use by Internet retailers. But the basic idea of dynamic pricing has been around since the dawn commerce. Essentially dynamic pricing allows for the point-of-sale (i.e., at the time and place of purchase) price adjustments to take place for customers meeting certain criteria established by the seller. The most common and oldest form of dynamic pricing is haggling; the give-and-take that takes place between buyer and seller as they settle on a price. While the word haggling may conjure up visions of transactions taking place among vendors and customers in a street market, the concept is widely used in business markets as well where it carries the more reserved label of negotiated pricing.
Advances in computer hardware and software present a new dimension for the use of dynamic pricing. Unlike haggling, where the seller makes price adjustments based on a person-to-person discussion with a buyer, dynamic pricing uses sophisticated computer technology to adjust price. It achieves this by combining customer data (e.g., who they are, how they buy) with pre-programmed price offerings that are aimed at customers meeting certain criteria. For example, dynamic pricing is used in retail stores where customers’ use of loyalty cards triggers the store’s computer to access customer information. If customers’ characteristics match requirements in the software program they may be offered a special deal such as 10% off if they also purchase another product. Dynamic pricing is also widely used in airline ticket purchasing where type of customer (e.g., business vs. leisure traveler) and date of purchase can affect pricing.
On the Internet, marketers may use dynamic pricing to entice first time visitors to make a purchase by offering a one-time discount. This is accomplished by comparing information stored in the marketer’s computer database with identifier information gathered as the person is visiting a website. One way this is done is for a website to leave small data files called “cookies” on a visitor’s computer when they first access the marketer’s website. A cookie can reside on the visitors computer for some time and allows the marketer to monitor the user’s behavior on the site such as how often they visit, how long they spend on the site, what webpages they access and much more. The marketer can then program special software, often called campaign management software, to send visitors a special offer such as a discount. For instance, the marketer may have a discount offered if the visitor has come to the site at least five times in the last six months but has never purchased.