Overcoming dynamic pricing naysayers to reap benefits

When pub group Stonegate announced on posters in some of its pubs that it was to add 20p to a pint of beer during peak times it hit the headlines amid a frenzied outcry about this use of dynamic pricing across as many as 800 of its outlets.

It was no doubt surprised by the pushback because it had deployed just such a technique previously, including during last year’s World Cup when it increased beer prices for England games. What would also have possibly shocked the company is the fact that adopting a pricing mechanism that changes at different times has become a fundamental part of a variety of consumer-facing industries.

The price is right?

The most obvious are hotels and flights where prices change constantly but it also occurs in many other business areas including car hire, Uber and other taxi services, theatres, cinemas and sporting events.

The fact that it is often called ‘surge pricing’ highlights how it has a negative perception among many commentators and consumers. Proof of this downbeat view comes from research undertaken across visitor attractions and the industry’s widespread adoption of high-and-low-season pricing strategies for school holidays and other peak periods. A survey by Convious, Baker Richards found that only around 20% of people believe it acceptable to increase prices at busier times whereas a rather larger 60% find it acceptable for prices to be lower at less busy times. This suggests that many people like the idea of dynamic pricing but only when it involves lower prices.

Benefits for small businesses

This negative sentiment is a shame because it could be so beneficial to the hospitality and retail industries and customers alike. Retailers for instance could benefit from using it to better manage their inventory – whether that be products on shelves or services – that ensures they can optimise the pricing of the product they have available.

This does not mean solely raising prices when stocks run low but also reducing prices when there is an abundance of stock. There is also an opportunity for retailers to efficiently reduce the prices of perishable goods until they clear their stocks and eradicate the serious issue of waste that is both economically and environmentally damaging.

Who’s doing it right?

One example of using dynamic pricing to remove waste is Pesca restaurant in Amsterdam that continuously decreases the price of its fish to ensure it sells out by the close of business. The changing supply of fish varies depending on daily delivery, seasonal availability, and weather conditions. These various data points all feed into its decision-making on pricing levels.

Halfords also uses various data points for its dynamic pricing activity involving the call out service it offers within its motor division. There is no fixed price for an engineer to visit a customer, it is instead based on various factors such as the distance the vans are away from the customer, the time of day, and the availability of the relevant tools/products. It prices the call outs at a level that ensures it can achieve a consistent level of profitability. 

Cinema chain Vue has also been developing its dynamic pricing activity with the accelerated roll-out of flexible pricing across its outlets after finding a demand for it in the market when it was initially introduced. The company has stated, “Price optimisation enables the group to offer agile pricing strategies to customers to optimise admissions and profit.”

These companies are adopting similar practices to online retailers such as Amazon that have used them incredibly effectively foe years. Amazon has stated that it uses various data points across purchase behaviour and market trends to change prices an impressive 2.5 million times per day. This has been linked to it increasing its profits by as much as 25%.

Pricing power

One advantage that online retailers have over traditional players with physical stores is that their pricing is typically rather opaque and only visible to individual customers at the time of the transaction. The reality for many merchants with high street stores is that they also have the time-consuming complication of having to print out new paper price labels when changes are to be made. This is not particularly dynamic.

This latter issue would certainly be overcome with electronic shelf-edge labels (ESLs) on which prices can be changed instantly in real-time but these have still not yet been widely adopted by retailers. Various trials have been undertaken over the years by the major grocers but they have largely been curtailed. Asda recently announced the end of a trial involving 25,000 ESLs at its Stevenage superstore.

Although such action might dent the progress of dynamic pricing in the supermarkets it is unlikely to put an end to experimentation across the wider retail and hospitality industries because if harnessed correctly it can be an extremely powerful tool.

Final thoughts

But to help progress things along businesses would be well advised to provide an educational piece that highlights to consumers the upsides of dynamic pricing in order to avoid the backlash suffered by Stonegate. This would hopefully provide the platform for them to tap into the many opportunities that dynamic pricing potentially offers businesses of various descriptions.

Glynn Davis

Glynn Davis is a business journalist specialising in the retail and food and drink sectors. As well as writing for publications including Retail Week, Ecommerce Age, Propel, Caterer and Retail Bulletin, he’s also the founder and editor of Retail Insider and Beer Insider.