How brands can make dynamic pricing fairer for customers

The Uber ride that increases in price when it's rush hour or raining, the fare for a flight that costs more with every minute you stay on the airline's website, the concert ticket that at peak demand would require you to remortgage your house in order to afford it (Oasis tickets, here's looking at you). In all seriousness, even the price of a hamburger can fluctuate these days based on demand at specific times.

 

Dynamic pricing is pervasive in the digital era and most of us, by this point, have been on the sharp end of it. Airlines, hotels, movie theatres, ride hailing and food delivery apps all use dynamic pricing and adjust their prices for products and services based on real-time factors such as demand, supply, competition, consumer behaviour, weather, and local events. 

 

Dynamic pricing has reportedly helped Amazon boost profits by 25%. The online retail giant is reported to change product prices 2.5 million times a day. Amazon has said they make pricing selections using a system that considers a variety of data sources including consumer activity, rival pricing, inventory, order history, and predicted margin.

 

But is it a fair and equitable strategy? While dynamic pricing has become a major trend in e-commerce and undoubtedly benefits brands by optimising profit margins, is it fair to consumers?

 

"While dynamic pricing is inherently fair when it accurately reflects the supply and demand relationship, how the algorithm is applied varies between companies," says Flora Wang, senior engagement manager at Prophet. "In most cases, it allows brands to maximise sales and revenue by charging the optimal price. Meanwhile, this approach can sometimes benefit consumers by offering better value, such as lower prices for airline tickets during off-peak seasons."

 

 

Yet while consumers can sometimes benefit from lower prices when demand drops or as products near their expiration, many customers remain skeptical and dislike price variability. Charging different prices for the same product to different consumer simultaneously due to different purchasing behaviours or profiles can also be seen as discriminatory, potentially eroding the trust of loyal consumers.

 

In 2021, a Ctrip customer (one of China's top travel platforms) reported receiving three separate offers for the same hotel on the same day while using three different phone brands. Notably, the offer given on his iPhone was the highest, which irritated him. Despite Ctrip's claim that it does not use big data technologies to unfairly charge tourists, a passenger filed another complaint in 2022 about a higher price for the same flight as her mother. She told the reporter that the difference in experience could be attributed to her status as a regular customer, whereas her mother was a newbie on the travel platform. This tourist was concerned about the discrepancy in costs and the unequal treatments they received.

 

Ctrip customers have also felt deceived upon discovering that the platform displayed different prices for the same hotel room based on whether they were booking via desktop, mobile app, or after repeat searches.

 

Meanwhile, the Philippine Centre for Investigative Journalism (PCIJ) discovered that GrabCar rides always contain surge fees, regardless of time or day, resulting in costs that are continuously higher than the lowest fare estimated by Grab's fare check tool.

 

"Consumers often express scepticism and concern over dynamic pricing, especially when it is perceived as surge pricing that increases costs during peak demand periods," says Matthew Crabbe, vice president of trends, APAC, Mintel. "Despite the concerns, there are potential benefits to dynamic pricing. It can help businesses manage demand and increase profitability by offering discounts during off-peak periods, which could lead to cheaper options for consumers who are flexible with their timing."

 

Meanwhile, according to Robert Sanders of University of California, San Diego, in the grocery sector, the dynamic has the potential to reduce food waste and increase margins, aligning with consumer expectations for sustainability.

 

Transparency is key

 

A key factor in consumer acceptance of dynamic pricing is transparency. Companies that openly communicate how and why prices fluctuate can foster greater consumer confidence. 

 

"Lessons from industries like Uber demonstrate that consumer backlash can be mitigated by explaining the logic behind pricing strategies," says Sam Shaw, strategy director, Canvas8. "Retailers should prioritise transparency to maintain trust and prevent the perception of manipulation. Moreover, when done right, dynamic pricing can offer substantial savings to consumers and encourage informed purchasing decisions."

 

Ride-hailing giant Uber has published a guide to its dynamic pricing model in an effort to inform customers as to why its price changes are so common. The guide states: "When demand increases, Uber uses variable costs to encourage more drivers to get on the road and help deal with the number of rider requests... Once more drivers get on the road and ride requests are taken, the demand will become more manageable and fares should revert to normal."

 

 

Much like Uber, some brands are focussing more on dynamic pricing management, providing clear explanations for why prices/fees vary at different periods and implementing capped fees or consumer compensations to protect customer interests. 

 

However, regulation around dynamic pricing remains scant. Dynamic pricing is permitted in most sectors, but it must adhere to applicable laws and regulations, such as those against discrimination and those designed to protect consumers. It becomes unlawful if it involves practices like price fixing, collusion, discriminatory pricing, or misleading tactics. Various jurisdictions, including the European Union, the United States and Australia have some form of price discrimination law or regulation in place.

 

Under discrimination law in Australia, a retailer cannot set higher prices for people due to gender, disability, race, age or other protected characteristics, but it can charge people different prices for the same product or service.

 

“Dynamic pricing is not illegal, but businesses must be clear about the price consumers will pay,” says a spokesperson from the Australian Competition and Consumer Commission. “Whether or not a business’s use of dynamic pricing may be misleading will depend on the circumstances involved in each case, including what representations a business may have made to consumers about their pricing."

 

Last month, following widespread criticism of dynamic pricing used to sell concert tickets for British band Oasis that saw standing ticket prices rise from $197 (£148) on pre-sale to more than $448 (£337), a number of MPs are seeking to introduce legislation in the Republic of Ireland that would ban dynamic pricing. 

 

Meanwhile, the UK government has already stated that it will conduct a review of the transparency and usage of dynamic pricing, including the technologies used to promote it through queuing systems.

 

"While dynamic pricing is primarily driven by demand and supply, regulations play a key role in maintaining market stability and safeguarding consumer interests," says Wang. "Additionally, since dynamic pricing algorithms often rely on personal data, such as browsing history or purchasing behaviour, regulations can establish clear limits on how and when companies can access and use this data for pricing purposes."

 

Dos and don'ts

 

Consumer trust is a delicate asset that brands must protect, especially in the realm of dynamic pricing. There is an ongoing need for brands to better acknowledge and address the potential negative impacts of fluctuating prices on consumer perception.

 

"Adopting comprehensive guidelines can help ensure dynamic pricing benefits all stakeholders without inadvertently harming brand reputation," says Shaw. "Notably, dynamic pricing can enhance the shopping experience by providing economic incentives during off-peak times or for products close to expiration."

 

Successful dynamic pricing hinges on a few critical dos and don'ts. Top of that list is transparency. Clearly explaining why prices change and how the pricing strategy works is crucial. 

 

"To foster consumer trust, it's essential to clearly explain the reasons behind price changes in specific situations to drive a perception of fairness," says Wang. "For example, do brands implement dynamic pricing solely for increased profits, or do they provide enhanced value and benefits to consumers?"

 

Communicating value by ensuring that consumers understand the value they are getting at different price points is also important. Using data ethically is essential. And it's also wise to regularly test pricing strategies to balance profitability and consumer satisfaction.

 

Meanwhile, brands should avoid price gouging and exploiting high demand situations to excessively increase prices. Pricing strategies should be kept simple for consumers to understand. And adjustments in price should not disadvantage specific consumer groups. 

 

"Charging different prices for the same product to different consumers simultaneously due to different purchasing behaviours or profiles can be seen as discriminatory, potentially eroding the trust of loyal consumers," says Wang.

 

And brands should avoid focusing solely on short-term gains, and instead consider the long-term impact on brand reputation and customer loyalty.

 

"It is crucial for companies to carefully navigate these concerns to avoid eroding consumer trust and ensure equitable treatment," says Shaw. "When implemented thoughtfully, dynamic pricing can lead to lower prices for consumers, enhancing their shopping experience and increasing sales for businesses."