The Dynamic Pricing Game: Win, Lose, or Draw?

Seated in front of my laptop, contemplating how best to capture the ‘essence’ of retail in my latest blog, I am battling an online addiction. No…it isn’t facebook. Instead, my vice takes the form of numerous travel discount sites, each offering different fares for my pending flight to Europe, and each changing their rate by the day, hour, or even by the minute!

With equal parts frustration and excitement, I feel compelled to independently seek out “the” best deal. Inputting various travel dates, alternating departing and destination airports, and even searching the web for online promotion codes, I have become consumed by the dynamic pricing game.

But what are the rules of this game? Who are the winners, and who are the losers? After conducting some research, I realized that nowhere is dynamic pricing more evident than in the multitude of 3rd party websites that act as distributors of other companies’ goods and services. Portals such as Expedia, Orbitz, Amazon and Ebay utilize Adam Smith’s market mechanism to match supply with demand.

Priceline.com has even gone so far as to allow users to “Name Your Own Price” on flights and other travel related purchases. Users enter a dollar amount for which they are willing to spend (on say a roundtrip flight to London), and Priceline then negotiates with its partners to see if any are willing to fulfill this offer. In 2000, Priceline even attempted to extend this “Name Your Own Price” policy to grocery products and gasoline1. The catch, (of course there’s a catch!) is that consumers cannot specify in advance which brand they prefer. Rather, they select a generic product category (such as Bran & Raisin cereal), and are subject to purchasing whichever brand is returned.

When looking at the RVP of these dynamically priced 3rd party retailers we can see the offering is quite unique. While face-to-face interaction and customer service are virtually non-existent on these sites (generally relegated to a list of FAQ or a daunting 1-800 line), the customer experience is still highly engaging. The variable nature of the pricing model makes the process highly interactive, and encourages the customer to form an emotional attachment to the 3rd party retailer. Essentially, the site becomes the customer’s partner in attaining great deals.

Both selection and convenience are forfeited for price. The hours invested searching online may be likened to a Sunday morning spent cutting coupons. Savings gained may be small ($2.59 on a box of cereal), or significant ($200+ on a transatlantic flight). However, given the volatility inherent to dynamic pricing, risk exists that the core component of this RVP (the win of landing a great deal), is eliminated due to high demand.

So how does this game play out? It appears there are no consistent winners. Consumer gains come at the price of time and choice, and are not always guaranteed. Manufacturers are able to move surplus supply without having to openly advertise lower prices. However in doing so, they lose control of brand perception, and in the case of portals such as Priceline, the value derived from brand equity.

With dynamic pricing creating pendulum shifts of power, it appears as though I won’t be breaking this addiction anytime soon…. unless facebook starts offering flight deals!

Lauren Roberts
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1While cash flow issues eventually shut this leg of the business down, the idea was well received by customers and garnered stock prices of $104/share at its peak.


http://nymag.com/nymetro/news/bizfinance/columns/bottomline/1778/
http://www.priceline.com/Customerservice/FAQ/howitworks/air.asp?session_key=400011AC410011AC2008032023502229b400162932&plf=pcln
http://pcworld.about.com/news/Oct052000id31121.htm
http://www.internetnews.com/bus-news/article.php/477561
http://digitalenterprise.org/auctions/auctions.html
http://www.news.com/2100-1017-240700.html