If you’ve ever purchased a plane ticket, hotel room, or rideshare, you’ve likely experienced dynamic pricing.
Many companies use dynamic pricing to adjust product prices based on real-time market changes. It’s why ordering an Uber after a concert might be more expensive, or why you might see airfare double or triple in price during a busy travel season.
Dynamic pricing can help or hurt your wallet, depending on the situation. Here’s how it works, and how to ensure you’re getting the best price possible.
What is dynamic pricing?
Dynamic pricing is a strategy in which companies adjust prices based on supply and demand, competitor pricing, and inventory levels. It relies on external signals to determine how much a product or service should cost and how much a customer is willing to pay, rather than setting a fixed price based on the value of the product or service itself.
Dynamic pricing isn’t new, according to Henry Jin, a retail supply chain and demand planning expert from Miami University’s Farmer School of Business. “Some form of dynamic pricing has always been around, and it’s particularly prevalent in industries where margins are thin, or if either demand or supply can be very volatile,” he explained.
Jin added, “For the former, dynamic pricing allows companies to proactively pass through their own cost increases so they aren’t forced to absorb losses. For the latter, it allows companies to dynamically balance supply (service capacity and inventory) with demand.”
Some common examples of personalized pricing include:
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Rideshare rates
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Hotel rates
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Airfare
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Concert tickets
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Sporting event tickets
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Electricity rates
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Food delivery services
While dynamic pricing is very common in hospitality, tourism, and service industries, it is also common among retailers.
How does dynamic pricing work?
Many companies, from online retailers to companies with brick-and-mortar stores, use dynamic pricing and personalized promotions.
“We run this across more than 350,000 [products] on major online retailers, such as Amazon, Walmart, and Target, and what works varies by product, by category, and even by brand,” said Mike Danford, co-owner and chief strategy officer at Adverio, an omni-marketplace operator group.
Danford explained that within those marketplaces, sellers change their prices based on what’s happening in the market, especially how quickly products are selling. “If units sold drop too low, the price typically drops incrementally until the sell-through rate picks up,” he said. “If units outpace the seller’s replenishment rate, pricing typically goes up.”
Other factors — time of day, day of the week, seasonality, supply and demand, inventory age, and competitor prices and promotions — can also play a role in how certain items or services are priced, according to Danford.
Sellers may even adjust their pricing for individual shoppers based on their purchase history. This is often referred to as personalized pricing, which can include offering a special discount or promotion to shoppers who leave items sitting in their virtual carts, or providing coupons to returning customers.
“Things like personalized coupons effectively become personalized prices,” Jin said. “Moreover, there are also retailers that are really good at using browser cookies to match with shopping accounts, which in turn can merge both online and offline purchases.”
Dynamic pricing vs. surveillance pricing
Dynamic pricing may seem unfair in some cases, but this practice is legal. However, when companies collect personal customer data to set higher individual prices or encourage more spending, it can be considered discriminatory.
“Surveillance pricing” goes a step further than dynamic pricing by using data about an individual consumer — or a narrowly defined group of consumers — to determine or influence the price they receive. That data could include location, demographics, device information, or other behavioral data collected by the company.
Research by the Federal Trade Commission (FTC) uncovered several instances of surveillance price targeting by retailers. Some examples include:
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Consumers profiled as new parents are intentionally shown higher-priced baby thermometers on the first page of their in-app search results, based on their ZIP code and purchase time.
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A person who visits a car dealership and uses an in-store kiosk to compare options for a car may be segmented as a “first-time car buyer” by the dealership, inferring that the shopper might be less savvy about car buying and be promoted particular financing rates, trade-in discounts, or maintenance products.
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A hypothetical customer who visits a sports betting website demonstrates hesitation by lingering on the homepage longer than expected or by moving their cursor toward the button to close out their browser tab, which may trigger a pop-up to incentivize the visitor to remain on the website and place a bet.
Surveillance pricing is currently legal at the federal level, though the FTC has raised concerns about surveillance pricing practices and whether they could violate consumer protection laws.
“When consumers see a listed price, they expect it to be the same price that everyone else sees, not the retailer’s estimate of how much they are willing to pay based on their personal data,” said FTC Chairman Andrew Ferguson in a statement. “The FTC does not have the legal authority to ban personalized pricing in all circumstances, but businesses that fail to tell consumers how their personal data is being used to set a price may be in violation of the FTC Act and other laws we enforce. We are seeking public input on this draft statement, which would put businesses engaged in or considering personalized pricing on notice that the Trump-Vance FTC will not hesitate to enforce the law in this space.”
Meanwhile, a growing number of states have enacted bans or strict disclosure requirements to combat surveillance pricing.
How to avoid dynamic pricing and save money
Dynamic pricing is here to stay, and while regulators work to put safeguards in place to protect consumers’ data, there are moves you can make to avoid having your personal information used against you.
Abandon your shopping cart
Adding an item to your cart and stopping short of placing an order could prompt retailers to offer a lower price or promotion to seal the deal.
“It’s almost certain that the retailer algorithm would flag your shopping cart for conversion incentive,” Jin said. “A little delayed gratification can result in substantial savings.”
However, this strategy isn’t a guarantee; it depends on the demand for the product. “If it is a popular product and the retailer has no concerns with selling through their inventory, then it would have no incentive to convert your shopping cart into a sale,” Jin added.
Clear your cookies and use a private browsing tab
Cookies are small bits of data stored on your computer about your browsing activity, such as the websites you visit, pages you view, links you click, and items you add to your cart, to provide a more personalized experience on certain websites.
Clearing this information on your computer can prevent your data from being stored and ensure that your personal information and preferences aren’t used to influence pricing. Opening a new private or incognito browsing tab can also prevent stored data from influencing the prices and deals you see online.
Compare prices across devices and sellers before buying
Before making a purchase, check the price of that item on different devices (laptop, tablet, phone, etc.) to make sure the price you’re seeing is consistent and not influenced by your stored data. You should also take the time to compare the price against prices or rates offered by competitors.
Set price alerts
Prices can fluctuate over time, so setting up price alerts allows you to be notified when an item’s price changes. Tools such as CamelCamelCamel, Keepa, and Honey can track a product’s price and alert you when it falls below a threshold you choose. Some also provide price histories, which can help you determine whether a sale is actually a good deal.
Shop with companies that offer price-match policies
In some cases, you can’t put a purchase on hold indefinitely. Purchasing items from retailers that offer price matching or price adjustments ensures that if the price of that item suddenly drops or a competitor offers a better deal, you can qualify for a partial refund or discount.
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