The Dynamic Pricing Revolution

As we note in our tutorials dealing with pricing decisions, for many organizations, and especially those selling tangible products, setting price is often fairly straightforward exercise. You figure out what it costs to produce your product and then set the list price by determining what the markup will be. Of course, there are adjustments that can take place to the list price, such as offering discounts to encourage purchasing. But for many marketers determining price is a rather mechanical exercise and not the most exciting part of their job.

While such a rote method of pricing is common for product marketers, services marketers often take a much different approach. They view the demand for their product as being quite variable and look to adjust their price accordingly. For instance, during some periods demand is very strong in which case they can get away charging a higher price compared to times when demand slacks off and a lower price makes more sense. This approach to pricing, called dynamic pricing, is common with transportation services, such as airline fares, and hospitality services, such as hotel room pricing.

A key reason dynamic pricing has become an accepted practice in these industries is because of the evolution of e-commerce technology. Because of the Internet and mobile technology, these industries derive an extremely larger percentage of customers without directly communicating with them. While this may seem to be a bad thing, consider that what these industries do obtain is information captured when customers use these technologies. This information enables marketers to see what is or is not in demand at any point in time. Knowing this can then signal what the right price should be.

A great example of how a service company uses customer information to set price can be seen in this Washington Post story. It explains the dynamic pricing methods used by taxi service Uber. Their so-called “surge pricing” approach is powered by sophisticated computer programming that then determines what price to charge its customers. While the angle of the story is a college professor’s assessment of how Uber drivers are affected by surge pricing, there are additional details presented explaining how this dynamic pricing method works.