Information moves so fast in today’s Internet-enabled world that it can be difficult for companies to keep up. In the case of online retail, demand for a product can shift minute-by-minute, making accurate pricing an extremely difficult task. That’s why many businesses are opting to price their goods “dynamically” rather than relying on a single concrete number.
Although new to some retailers, dynamic pricing has been common in the airline industry for years. In order to lessen the likelihood of unsold seats, airlines price tickets on a sliding scale. Prices remain low if the plane is under-booked and then gradually increase as it fills up. Companies in other industries are now seeing the benefit of this system when combined with instant access Web technology. The St. Louis Cardinals baseball team, for instance, now prices tickets to home games on a sliding scale depending on the opponent. The company realized it was losing revenue by pricing seats for games against big opponents at the same level as any ordinary game throughout the season. Other entertainment enterprises such as theaters and golf courses are implementing similar dynamic pricing programs.
It is in the retail world, though, that dynamic pricing is causing somewhat of a revolution. Given online retail’s immediate access to data, analysts can quickly crunch numbers on any product in a pricing program to see if it is earning its full value. In the case of a popular Lego set, the manufacturer’s suggested retail price (MSRP) came out to about $119, but most sellers on Amazon listed the toy around $140. That means Lego is missing out on additional profits for each unit sold. That’s why an increasing number of merchants are choosing to ignore MSRPs. Instead, they simply set a floor price on a product and then let dynamic pricing programs take over from there. The software allows prices to fluctuate in real time according to demand and a number of other factors. This same system could soon appear in brick-and-mortar stores with electronic price tags that rise and fall just as quickly.
Questions:
- Why do businesses like airlines and hotels vary prices regularly?
- Why is dynamic pricing growing rapidly at the retail level?
Source: Bill Saporito, “This Offer Won’t Last!” Time, January 21, 2013. Photo courtesy of William Ward.