The dynamic pricing conundrum

Consumers are familiar with the prices of some goods and services changing according to the time of day or demand, so why not others? Nicola Eaton Sawford explains.

Customers, have been used to dynamic pricing for many years. They have come to expect that taking a break in the school holidays and taking the train at peak commuter times is going be considerably more expensive. Most understand that this is about managing capacity – the plane only has so many seats. Or about spreading the load – no-one enjoys an overcrowded train. From telephone tariffs at peak times through to early bird pricing at your local restaurant, customers are already presented with dynamic pricing every day for certain things. But what impact does dynamic pricing have on how customers feel?

Some say fixed price products and services may become a thing of the past in as little as five years. The same voices predicted that services would increasingly become “pay on demand” and they got that right.

Not only does dynamic pricing have a financial implication that customers may find uncomfortable, it also adds a significant amount of complexity to shopping – complexity drives up customer effort and customer effort tends to drive down customer satisfaction. How would you feel going into the supermarket knowing each product price could vary wildly from the last time you bought it? It’s a potential budgeting nightmare.

Other sectors are now adopting dynamic pricing approaches. Only last week Tesco trialled a system in its stores enabling price changes at the shelf, across multiple stores, at the touch of a button. In future you might watch your bag of spuds change in price as you reach for it. The debate among supermarkets now is whether the price of goods could in future reflect demand (or other factors), perhaps changing dependent of time of day. M&S has trialled dynamic pricing to reduce the cost of lunch items purchased before 11am and smooth their lunchtime peak. But do customers really have the stomach for this?

In energy, time-of-use tariffs have been around for years – from good old Economy 7 introduced in the 1970s through to contemporary time-of-use tariffs enabled by smart meters. The UK is struggling to meet electricity demand at peak times. Time-of-use tariffs serve a very useful purpose in encouraging customers to shift usage to different times of day so demand can be met. If customers are able to move their usage, great, they get a financial benefit. But what if you can’t be flexible, how will you feel then?

eBay was launched in 1998 and brought auctions into customers’ homes. Customers using it became increasingly comfortable with the notion of “sold to the highest bidder” and of identical items being acquired at different prices. Customers who shop at Amazon see the prices of items in their basket changing all the time. Somehow this seems more palatable to a customer than sitting on a plane and discovering they paid a fraction of what you did for the exact same experience.

Supply and demand has been a basic commercial model for centuries but to a degree, domestic consumers have been protected from it with stable day-to-day pricing in most sectors, because organisations absorb the price volatility in the background. Is that certainty for customers now set to disappear? Not all the organisations and sectors adopting dynamic pricing are doing it because of capacity restrictions or to achieve customer experience benefits or to change customer behaviour. Some are doing it just for more profit. Are customers going to see through that?

Customers can warm to dynamic pricing models that bring them benefits as an individual (or at least do not penalise them) and are simple and transparent. They will warm to dynamic pricing for some products and services more easily than others. Those customers who are trapped by a dynamic pricing model, for example parents of school children who can only take breaks in the holidays, can become very dissatisfied and feel very unfairly treated, boycott organisations and influence others. It’s like roses on Valentine’s Day – the obligation, the beautiful gesture, spoiled by that ripped-off sensation. If you are not careful, dynamic pricing can break relationships with the very customers who might be your lifeblood. And it may not show immediately. It can take a while for a customer to realise they are in a dynamic pricing situation, they may buy at the higher price a few times – so you may not see the effect of your dynamic pricing approach on customer attrition immediately. Will you accurately recognise the cause if there is a delay?

Dynamic pricing has a dramatic effect on a customer’s perception of value for money – not just of the product or service they have bought but of the organisation as a whole. It is important that you know what your customers’ value for money perception is and how dynamic pricing alters it. The uncertainty created by dynamic pricing can negatively impact trust. It can have a dramatic effect on customer satisfaction (CSAT) and net promoter score (NPS) – a product or service that is 9 out of 10 priced at £100 might be 10 out of 10 at £50 in the sale and 6 out of 10 at £250 when surge priced during peak demand periods.

Could we imagine a time when an ice cream costs double on a sunny day? Petrol prices surge on a Bank Holiday? Lemsip triples in price during a flu epidemic?

From a customer experience perspective, dynamic pricing is an oddity and needs to be cleverly handled. Introducing it with sensitivity to its impact is key. That customers see it as simple and transparent is crucial: customers find it a lot easier to accept price volatility if they have a clear understanding and feel a degree of control over what they pay.

When considering adopting a dynamic pricing strategy, it is easy to get over-excited about the financial and commercial opportunity and steam ahead. It is vital you are challenged and have your rose-tinted glasses off when you think about the impact on customer experience and customer perceptions. Too often long-term loyalty and re-purchase propensity is sacrificed for short-term gain. If you abuse your lake and aggressively fish, eventually there will be no more fish.