Dynamic pricing (surge pricing)
Dynamic pricing, often referred to as surge pricing, is a pricing strategy where businesses adjust prices in response to real-time market conditions. This approach gained popularity with the rise of online commerce in the 1990s, enabling retailers to quickly modify prices based on factors like supply, demand, and competitor pricing. Unlike traditional pricing methods, which often relied on fixed price tags, dynamic pricing allows for a range of prices that can fluctuate according to market dynamics. Modern retailers increasingly employ digital analytics software to assess individual consumer behavior and willingness to pay, leading to personalized pricing offers.
While this method can optimize profits for businesses, it has generated mixed reactions among consumers. Some individuals find it unfair when two customers are charged different prices for the same product, fostering a sense of distrust. However, dynamic pricing is widely accepted in certain sectors, such as airline tickets and event ticketing, where consumers generally understand that prices can vary based on availability and timing. Despite its potential benefits, the practice can evoke strong feelings about fairness and transparency in pricing, highlighting the ongoing debate between retailers' profit motives and consumers' expectations for equitable treatment.
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Dynamic pricing (surge pricing)
Dynamic pricing, also called surge pricing, is the process of rapidly adjusting prices in response to changing market conditions. It became particularly popular when commerce began shifting to the Internet in the 1990s, allowing online retailers to rapidly change prices in order to maximize profits. Many retailers hired market analysts who helped set prices for particular times or regions; however, in the modern era, larger companies typically utilize digital analytics software. This software allows companies to rapidly adjust prices for a variety of factors, including supply, demand, and the prices of competitors.
Modern dynamic pricing software allows companies to offer individualized prices to consumers. The software predicts the maximum price that a specific consumer may be willing to pay, then offers that price. Many consumers believe that such methods are unfair and may feel cheated when someone else is offered a significantly lower price. However, the process has already been widely implemented in several industries.
Background
Though the process of using computer algorithms to determine pricing is new to the market, dynamic pricing is not. Historically, many shopkeepers utilized dynamic pricing. Prices were typically not set beforehand and could be adjusted at any moment due to the effects of supply and demand. Supply and demand is the economic mechanism that causes prices in a free market to rise and fall. If the supply of an object is high, and demand for an object is low, the price of the object will fall. If the supply of an object is low, and demand for an object is high, the price of the object will rise. Additionally, many shopkeepers would adjust prices based on what individual customers were willing to pay. Often, shopkeepers and customers would engage in a price negotiation known as haggling.
In the years after the Industrial Revolution of the late eighteenth and early nineteenth centuries, the practice of rapidly adjusting the price of products became less common. Once goods were mass produced, shopkeepers were less willing to constantly adjust their prices. Products were marked with price tags with the prices often recommended by the manufacturer. Additionally, the decline of the haggling system allowed store owners to hire less skilled shopkeepers without worrying that the store’s profits might suffer.
The proliferation of the Internet in the 1990s fueled a gradual shift to online commerce, making prices more flexible. Shopkeepers were removed from the equation, giving retailers the ability to change prices at a moment’s notice. An online retailer may notice that a particular product is selling more than it has in the past and that other online sources are selling the product at a higher price. The retailer can then decide to immediately adjust the price of the product. As this practice became more commonplace, many stores adopted dynamic pricing policies.
Overview
Dynamic pricing is the process of business owners rapidly adjusting prices in order to maximize profits. Retailers that utilize dynamic pricing typically do not have a predetermined price for their product. Instead, they have agreed upon a price range and may adjust that price within that range to sell the most products at the highest price point. Industries that utilize dynamic pricing often employ market analysts who make informed decisions about the most profitable price for a product at a given time.
In recent years, some retailers have also begun using digital analytics software. This software scans and interprets a larger volume of data at a much faster rate than human analysts. These elements allow retailers to adjust pricing based on an individual customer’s likelihood to purchase a product, not just the market as a whole. For example, if two people were to attempt to purchase the same product online, each may be offered a different price. Analytics software may use a variety of factors to determine the highest price that each person is willing to pay, theoretically maximizing profits for the retailer.
Such pricing models provide a number of advantages for retailers. They allow retailers to react in real time to supply and demand, raising prices and profits as their existing stock of an item is depleted. Dynamic pricing also allows for rapid price reductions to compete with other retailers, giving retailers the ability to quickly undercut the prices offered by a competitor that may be selling the same product.
Even brick-and-mortar stores such as Walmart have begun utilizing dynamic pricing within their physical locations. Because prices are displayed within the store, the process is slower than at online retailers. However, prices may be adjusted on a weekly basis and products may still be sold for different prices at different locations.
While dynamic pricing may be typically unpopular with consumers, many have accepted the practice in certain industries such as ticket sales. For example, most consumers understand that the ticket pricing on an airplane may change as the plane fills, and that each person on the plane may have paid a different price. Similar examples apply to tickets to events such as concerts. However, when dynamic pricing is applied to other products, consumers have a tendency to complain. Many feel that the lack of a set price for a given product is unfair. They may also dislike that analytics software determined that someone else was willing to pay less for a product, giving the other person a better deal.
Proponents of the system argue that if a consumer is willing to pay a certain price, then that consumer has gotten a good deal. They assert that the end goal of retailers is to find a price that both the consumer and the retailer believe is fair and secure a sale. For this reason, many retailers believe that a fair price for a product may differ between individual customers.
Bibliography
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