The downside of dynamic pricing


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Dynamic Pricing

We’ve talked about dynamic pricing before – most recently here when we described this pricing model’s recent uptake within Major League Baseball ticket sales. For those who may need a reminder, dynamic pricing is an algorithm-based pricing model where the face value of every ticket rises or falls based on real-time changes in demand. For baseball, these changes can be the result of myriad factors including who the opposing team happens to be on any given day, the game’s time and day (afternoon or evening, weekday or weekend), expected weather, pitching matchups, and even individual player injuries – all elements that factor into the demand for tickets. If this sounds familiar, it is – just look at the way most airlines price their tickets. It’s the same concept.

But as more and more industries look to dynamic pricing as a way to increase revenues, we must consider the downside to the practice.

First, most dynamic pricing schemes are opaque and complex – unclear to consumers in the sense that price comparisons many times don’t make sense. In the classic case of airline pricing, it’s not uncommon for one-way fares to exceed round-trip fares. Prices for the same (or similar seats) on the same flight can vary significantly – and, quite frequently, without any understandable rhyme or reason. And while airlines might be able to justify these price inconsistencies with their internal yield management programs comprised of years of data, most customers view the ticket purchasing experience as inconsistent and even unfair. So while airlines continue to rely on dynamic pricing to boost short-term revenues, the eventual long-term damage to a brand can be quite damaging.

Perhaps there is no better evidence of this long-term damage than the case of American Airlines. Long considered the expert in deriving every penny possible from its customer base by being an early adopter of dynamic pricing in the early 1980s, the airline sits in bankruptcy today – its brand destroyed in part because of a thirty-year policy of maximizing short-term revenue courtesy of dynamic pricing – all with little regard to the damage that this opaque and amazingly complex pricing structure inflicted on its customer base.

Second, there is a subtle but significant difference between how consumers view the value of their airline experience versus how they view the value of entertainment (live sports, concerts, etc.). Even as recently as thirty years ago, flying was considered part of the overall experience. Vacations were measured, in part, whether it included flying in a jet airliner – an added bonus. Most passengers dressed up for the occasion and viewed the flight with as much anticipation as arriving at the final destination.

Sadly, those days are long gone. The vast majority of today’s airline customers view the experience with distain. Their airline experience is regarded strictly as a conveyance to get from one destination to another, and customers fly because it’s the only practical way to get from point A to point B. Because of this mindset, they lump the ticket pricing experience within the basket that contains all the other ills of flying: long lines, TSA security policies, checked and carry-on baggage hassles…the list goes on and on.

The important point here is that customers want their entertainment options to be easy and stress-free. They don’t seem to mind paying a premium price for tickets, but they won’t tolerate having their buying experience resemble anything like airline pricing. And unlike the airline experience – where there may only be one or two airlines that serve a customer’s desired destination – today’s entertainment consumer has choices – choices that can easily drive business from one form of entertainment (e.g., professional sports) to another (college sports, music, etc.) This combination of higher expectations and more choices should be an important factor in determining the complexity (and clarity) of any dynamic pricing model. For those responsible for entertainment pricing who think they can easily replicate the airline use of dynamic pricing to increase short-term revenues, they would benefit from understanding the important differences between these two experiences.

The entertainment industry will continue to adopt dynamic pricing; the key to success will be whether it can make the process as clear and simple as possible. Anything that remotely resembles the airline experience will cause significant long-term damage to the particular entertainment brand. And it’s that long-term brand damage – the same damage that helped drive American Airlines into bankruptcy – that will be hard to observe and almost impossible to fix once the brand realizes what it has done.

Republished with author's permission from original post.

Patrick Lefler
Patrick Lefler is the founder of The Spruance Group -- a management consultancy that helps growing companies grow faster by providing unique value at the product level: specifically product marketing, pricing, and innovation. He is a former Marine Corps officer; a graduate of both Annapolis and The Wharton School, and has over twenty years of industry expertise.


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