6 March 2024

Is dynamic pricing surging out of control?

By Daniel Holden

Dynamic pricing, a strategy that adjusts prices in real-time based on various factors like demand, inventory levels, and consumer behaviour, has already established a firm foothold in the travel industry. Think of airlines, trains and even Uber, where prices fluctuate in response to peak travel hours and times of year.

With advancements in technology and the availability of data, dynamic pricing is slowly permeating into other sectors of the economy such as entertainment and hospitality. With recent debates surrounding energy price caps, an industry where dynamic pricing has been a focal point, the implications of this pricing strategy have gained even more relevance in public discourse. But what does this expansion mean, and is it a positive development?

There’s no doubt that many businesses have the potential to reap several benefits from employing dynamic pricing. Perhaps most notably, it enables companies to capitalise on peak demand, significantly boosting profitability. For instance, airlines charge higher prices for last minute bookings during busy travel seasons, maximising their revenue. Dynamic pricing also allows companies to efficiently manage their resources and capacity based on demand, minimising overbooking and underutilisation, which, in turn, leads to cost savings and more effective operations.

Despite what President Joe Biden would have you believe, it’s not just businesses that benefit from dynamic pricing; consumers can also profit from this strategy. During off-peak times or through promotions and discounts, consumers can access lower prices. This flexibility offers significant advantages for budget-conscious individuals, enabling them to access goods and services that may otherwise be unavailable or just save a few more pounds by travelling or going to enjoy a leisure activity at a different time.

While dynamic pricing offers numerous advantages, it’s not without its drawbacks. By its very nature, it results in different customers paying different prices for the same product or service. Customers have a tendency to perceive this as unfair, which can of course lead to dissatisfaction or a feeling that they are being exploited. Similarly, a lack of transparency in pricing can lead to confusion and frustration among consumers as they struggle to understand why they are paying different prices for the same product or service. Uber’s surge pricing controversy is a classic example, with accusations of price gouging proving particularly controversial during emergencies or major events.

So what direction will dynamic pricing take in the future? Advances in data analytics and AI will undoubtedly play a pivotal role in shaping dynamic pricing strategies going forward. While this opens up opportunities for businesses to refine their pricing strategies, it also raises concerns about ethics, privacy, and the need for regulation. It’s crucial that businesses maintain a balance between optimising profits and treating customers fairly and transparently.

Now to hospitality and entertainment – hotels and other accommodations routinely adjust room rates based on factors like season, local events, and occupancy rates. This allows them to maximise revenue during peak periods while offering cost-effective deals during slower times. Hotels are jumping on the trend and experimenting with personalised pricing based on customer data, providing loyal customers with tailored discounts and offers. Concerts, theatres, and sporting events often employ dynamic pricing to adapt ticket costs based on factors like seat location, demand, and proximity to the event date. This helps venues fill seats and optimise revenue, ensuring that the most popular events remain accessible while also maximising profitability.

So what is clear is that the continued use and expansion of dynamic pricing offer both benefits and drawbacks to consumers and businesses alike. It provides businesses with the potential for increased revenue and resource allocation, giving consumers the flexibility to choose when and how they spend their money. However, when using dynamic pricing, ethical considerations regarding fairness and responsible pricing practices cannot be avoided. As dynamic pricing continues to evolve, it is therefore vital that both businesses and consumers stay informed about pricing practices, enabling them to make fully informed decisions.

Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.

CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.

Daniel Holden is Group CEO at Trust Payments.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.