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Explore the pros and cons of dynamic pricing in eCommerce, and gain an understanding of the ethical considerations associated with this pricing strategy.
In a competitive marketplace, businesses are constantly seeking ways to maximise revenue and provide value to their customers.
One strategy that has gained significant traction (particularly in certain industries) is dynamic pricing. This pricing model allows online retailers to adjust their prices based on various factors like demand, competition, time of day, and even customer behaviour.
While dynamic pricing can offer many benefits, it also comes with some potential downsides. In this blog post, we’ll explore the pros and cons of using dynamic pricing on your website. We’ll also look at the ethical concerns and considerations related to using a dynamic pricing model.
Dynamic pricing has been in the news a lot recently, with the Oasis Ticketmaster surge pricing fiasco.
After hours spent in a virtual queue waiting to purchase tickets that had been advertised at £150, fans found that prices had climbed to as much as £355.
Yet, fans had not been made aware that this pricing model was in action. This coupled with a virtual queuing system that apparently kicked a lot of users out of the queue, wrongly identifying them as bots, left a very sour taste in the mouths of many.
Ticketmaster’s model (which artists opt into) dynamically raises or lowers ticket prices according to demand, and has received criticism previously.
Ticketmaster claims that this is to:
“give the most passionate fans fair and safe access to the most in-demand tickets while allowing the artists and everyone involved in staging live events to price tickets closer to their fair value”.
However, both the EU and the UK Government have said they will now review the practice, with the UK Government saying that they will include dynamic pricing in their review of “rip-off” resale sites and ticket touting.
So, is all dynamic pricing received in this way? Does it have any implementations that are beneficial to both users and businesses? We’ll take a look at some use cases below.
Dynamic pricing (also known as fluid or surge pricing among other things) is a flexible pricing strategy where the price of a product or service fluctuates in real-time based on specific variables.
These variables can include supply and demand, competitor prices, seasonality, customer demographics, and browsing habits.
You’ve likely encountered dynamic pricing while booking flights, hotels, or even shopping on major eCommerce platforms like Amazon.
This strategy is driven by algorithms and data analytics, allowing businesses to optimise prices automatically and capitalise on opportunities in real time.
UK and US consumer protection laws do not prohibit this form of price setting. Although certainly in the UK, Trading Standards requires that consumers are not misled. Transparency is key, as it should be in all areas of the eCommerce purchase process, whether that be pricing, sizing, item details, shipping costs, or delivery times.
One of the biggest advantages of dynamic pricing is the ability to optimise revenue. By adjusting prices based on demand or market conditions, businesses can charge more when demand is high or reduce prices during slow periods to attract more customers. This flexibility helps ensure that businesses don’t miss out on potential profits.
For example, an eCommerce site selling seasonal products can increase prices during peak seasons and offer discounts during the off-season to keep sales steady.
Dynamic pricing allows businesses to stay competitive in the market by adjusting prices in response to competitors. With real-time data on competitor pricing, you can lower your prices to attract cost-conscious shoppers or match a competitor’s deal to retain your market position.
This responsiveness ensures that your website remains relevant and appealing to potential customers, especially in industries with price-sensitive consumers.
Dynamic pricing can offer a more personalised experience for customers. By using data on customer behaviour, preferences, and demographics, businesses can tailor prices to specific segments of their audience.
For instance, loyal customers may be offered special discounts, while new customers might see introductory offers designed to entice them to purchase.
This targeted approach not only enhances the customer experience but also encourages repeat business and builds customer loyalty.
Dynamic pricing helps businesses manage inventory more efficiently. For example, if you have excess stock, you can reduce prices to encourage sales.
Conversely, if a product is running low in stock, you can raise prices to make the most of the remaining inventory. This kind of strategic pricing can reduce waste and improve overall profitability.
One of the major drawbacks of dynamic pricing is the potential for customer frustration.
If customers notice that prices fluctuate too frequently or feel they’ve been charged more than others for the same product, it can lead to dissatisfaction and damage your brand’s reputation.
Transparency is key when implementing dynamic pricing to avoid alienating your customers.
For instance, someone who buys a product today only to see the price drop the next day may feel they overpaid, leading to negative feedback or lost trust in your brand.
Implementing a dynamic pricing model can be complex and requires advanced technology, data analytics, and constant monitoring.
Businesses need sophisticated algorithms and tools to collect data, analyse trends, and adjust prices in real-time.
Whilst easily within reach of eCommerce giants like Amazon, or the big airlines, this can be both time-consuming and expensive, particularly for smaller businesses that may not have the resources to invest in such systems.
Moreover, mistakes in pricing adjustments due to inaccurate data or poorly set algorithms can lead to pricing errors, which could negatively impact your revenue and customer trust.
When businesses use dynamic pricing in highly competitive markets, it can trigger price wars. If you lower your prices to match or beat a competitor, they may do the same, leading to a race to the bottom.
This can hurt profit margins and, in the long run, damage the perceived value of your products or services.
Price wars can be particularly harmful if competitors have more financial resources to absorb losses, forcing smaller businesses to keep lowering prices unsustainably.
Dynamic pricing can be seen as unfair by customers, especially if they believe they’re being charged differently based on personal information or browsing behaviour. This can also raise alarms over data privacy and user tracking methods.
This perception of unfairness can harm your relationship with customers and lead to negative publicity, especially in cases where prices vary significantly between different groups of customers.
For example, if one customer is offered a lower price simply because they’re a first-time visitor, while a repeat customer pays more, it may create a feeling of exploitation.
Obviously, we covered some of the ethical concerns above when discussing the cons of dynamic pricing.
While it can increase efficiency and profits, several ethical considerations arise with this model, so let’s take a closer look at some of those ethical considerations.
Dynamic pricing can lead to unequal treatment of customers, as some may end up paying significantly more for the same product or service based on factors such as location, time, or personal data.
For example, demand based pricing models are frequently used within the travel industry.
Certain times of the year see a high demand due to school holidays, as in general, children and teachers alike cannot take holiday during term times.
So for those with school aged kids, or for teachers, school holidays are the only times they can book travel in.
Is it fair that those who are constrained by factors like those above should have to pay more?
Higher-income customers might absorb price surges more easily than lower-income individuals, exacerbating social and economic inequalities. Just because something is in high demand, should it only be attainable by the more wealthy?
If customers are unaware of why prices fluctuate, they may perceive the system as unfair or manipulative. A lack of transparency erodes trust in businesses using dynamic pricing.
Sudden price increases without explanation can lead to customer frustration and damage a brand’s reputation.
In situations of urgent need, such as during natural disasters or emergencies, dynamic pricing may escalate into price gouging. This is where companies exploit people’s vulnerability by significantly raising prices.
During the COVID 19 pandemic, Amazon came under fire for the price hikes for essential items like face masks and hand sanitiser.
Dynamic pricing for essential goods and services like healthcare, food, or electricity can be particularly problematic, as these are necessities people cannot easily avoid purchasing, even at inflated prices.
Automated pricing algorithms can unintentionally reinforce discrimination if they rely on data that reflects existing social inequalities. Just look at AI bias for a close parallel.
For example, certain demographics may be charged more based on profiling or past purchasing behaviour.
Dynamic pricing models often rely on extensive customer data collection, raising concerns about how personal information is used and whether it invades users’ privacy.
Privacy has become more and more important to consumers, and public awareness of the topic is higher than ever. Not to mention the potential repercussions of failing to protect the data you do collect.
Businesses may exploit consumer psychology by creating artificial scarcity or urgency to manipulate purchasing decisions. Whilst creating scarcity is a common practice in marketing in general, tying it to price increases adds another layer of obscuration.
In entertainment or eCommerce, dynamic pricing may encourage impulsive spending or exploit addictive behaviour by adjusting prices based on a user’s browsing habits.
Some consumers may lack the technological savvy or tools to compare prices effectively, placing them at a disadvantage compared to more tech-literate individuals who can track dynamic price changes.
Dynamic pricing may offer benefits (such as discounts) to those who frequently use digital platforms, while excluding or disadvantaging less frequent users, like older generations or those in rural areas.
Many jurisdictions have limited legal frameworks regulating dynamic pricing, leading to potential abuses without repercussions.
If not carefully monitored, dynamic pricing could violate consumer protection laws, especially when it blurs the line between fair market practices and exploitation.
We see this in action with the EU and UK Government investigating whether Ticketmaster violated any trading standards and consumer protection laws with this latest incident.
Constant price fluctuations might destabilise markets, particularly in sensitive sectors like housing or transportation, where price spikes could harm vulnerable communities.
If dynamic pricing is seen as exploitative or manipulative, it may result in public backlash, protests, or demands for regulatory intervention.
Due to a fair amount of negative press linked to incidents like the Ticketmaster example, public perception of dynamic pricing models is pretty negative, and it is often seen as price gouging. Do you want to potentially alienate customers by using divisive practices that they deem as shady?
Whilst the giants like Amazon can weather the negative public perception because of their market position, could your business?
To mitigate these issues, businesses using dynamic pricing should:
Dynamic pricing can offer benefits in terms of efficiency and resource allocation, but addressing these ethical challenges is essential for maintaining fairness and customer trust.
Dynamic pricing offers significant advantages, such as maximising revenue, responding to market conditions, and providing personalised pricing.
However, it also comes with some big challenges, including customer dissatisfaction, implementation complexity, and the potential for price wars.
Before implementing dynamic pricing on your website, it’s essential to consider your industry, target audience, and available resources.
If done correctly, dynamic pricing can give your business a competitive edge and boost profitability. But it’s crucial to balance flexibility with transparency to maintain customer trust and satisfaction.
