(Bloomberg Businessweek) -- If rental cars, hotel rooms, airfares, ride-share trips and concert tickets have anything in common, it’s certainly not the overwhelming confidence Americans feel when booking and buying them. Prices for these kinds of purchases fluctuate from one minute to the next—or, in many cases, from buyer to buyer. It’s not that fair prices don’t exist, but it can be impossible to feel sure that you’re getting one. You have no idea what anyone else might be paying for the same flight or seat or midsize sedan, or what you might have paid yesterday or could pay tomorrow. The possibility that you’re being taken for a fool (or outright discriminated against) looms every time you click “Buy.”
Put another way, no regular person has ever sat back and thought, “You know what? I want more of my interactions with the economy to feel like renting a car.”
Nevertheless, a suite of tactics collectively known as dynamic pricing has already crept into an expansive array of consumer transactions. Through dynamic pricing, retailers algorithmically adjust prices, sometimes in real time, using whatever data they can scrape together—the time of day, your location, the product’s popularity and inventory level, competitors’ prices, even whether you’ve visited the product page before. And this practice is likely to become much more widespread in pretty short order.
According to Dipanjan Chatterjee, a vice president and principal analyst at Forrester Research Inc., consumer businesses that have been profit-taking by raising prices over the past few years can’t just keep marking up their products the old-fashioned way. Americans seem to have been pushed to their limit, financially and psychologically, by the highest inflation in four decades; additional broad markups would risk alienating customers and tanking revenue, Chatterjee said in an email. “I fully expect companies will turn to more sophisticated pricing mechanisms like dynamic pricing to boost profitability,” he wrote.
Dynamic pricing—a blanket term that covers many slightly different tactics, including surge pricing, demand pricing and personalized pricing—is easiest to implement online, and plenty of internet retailers have been using it in some capacity for years. These merchants have a significant advantage in doing the kind of large-scale, fine-grained data collection that makes it possible to deploy algorithmic models to maximize purchases. Amazon.com Inc. is generally regarded as the retailer with the most sophisticated pricing operation. Not only does the megaretailer reprice its own products constantly, but it also gives its army of third-party sellers access to tools that can adjust their listings’ prices automatically to compete with other sellers or better comply with the changing preferences of Amazon’s internal search.
Thanks in part to the investment dollars pouring into seemingly every vaguely artificial-intelligence-tinged business, third-party software vendors have sprung up to offer similar capabilities to everyone from your landlord to your local ice cream shop. Plenty of them seem ready to give it a shot: In a recent survey of 755 American restaurant operators, the ordering platform Toast found that 70% were “very or extremely interested” in implementing dynamic pricing that would raise or lower prices depending on foot traffic or order volume. (Only 7% reported currently using the practice.) The proliferation of things such as plug-and-play order management software and Square’s tablet-based checkout systems has made it feasible for many more types of businesses to collect basic data on customers and use it to quickly adjust prices, dynamically or not. For larger brick-and-mortar retailers, the increasing popularity of installing digital shelf-labeling systems provides similar capabilities across thousands of products.
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The problem—or one of them, anyway—is that customers hate dynamic pricing almost as much as they hate normal price increases. Earlier this year, when Wendy’s Restaurant LLC announced it would test demand-based pricing at some of its restaurants in 2025, the internet blowback was so swift and forceful that the company ditched the plan entirely. Similarly, when news got out this summer that Walmart and Kroger stores were replacing paper price tags with digital shelf labels, both retailers had to publicly promise they had no plans to use them to raise prices indiscriminately. Ticketmaster’s demand-based pricing has provoked the ire of fan bases as disparate as Taylor Swift’s and Bruce Springsteen’s. When Oasis announced its long-awaited reunion tour dates in the UK, prices soared so high that the band refused to allow Ticketmaster to use the same tactic on subsequent American dates, calling it “an unacceptable experience for fans.”
The Federal Trade Commission has taken an interest in some of these pricing gambits, initiating a study last summer on how a handful of popular pricing services use surveillance data to manipulate how much they charge people. But as it stands, dynamic pricing is largely regarded as legal, as long as sellers don’t use protected characteristics such as race or gender to determine what buyers will pay. The algorithmic nature of dynamic pricing also gives sellers plausible deniability; who’s to say which data points were dispositive? The main risk for retailers is one of perception.
“Nontraditional pricing strategies like dynamic pricing have a marketing problem,” Forrester’s Chatterjee says. He points to Uber Technologies Inc.’s clumsy surge pricing—the flavor of dynamic pricing that people hate most virulently—as one source of broad public animus toward the idea, especially in transactions in which buyers expect static pricing. No one likes that airfares are higher around the holidays or that beachside hotels are more expensive during the summer, but it’s been that way for so long and is predictable enough that people generally accept it. Most will need to contend with these premiums only once or twice a year, plus advice abounds on money-saving travel hacks. Having to do some form of that calculus every time you buy groceries is an entirely different kind of budgeting burden.
Whether dynamic pricing does lead to the higher prices everyone is afraid of is a more complicated question. When used well, pretty much everyone agrees that it results in larger and more consistent profits for merchants, who are able to maximize margins and volumes simultaneously in a way that’s much harder with static prices. By definition, that means that at least some customers are getting good deals. A 2021 study of European grocery stores found that those using dynamic pricing through digital tags both improved margins for retailers and reduced the average cost of goods sold to consumers, especially for perishable products, which could be more effectively discounted as expiration dates neared.
Some people in the pricing industry have tried to encourage retailers to adopt dynamic pricing in ways that paint the practice in a more positive light. In an editorial in the trade publication Restaurant Dive, Catherine Tabor, the chief executive officer of the food service software company Sparkfly, urged restaurants to try out “dynamic offers”—essentially, a spontaneous, data-driven happy hour to boost foot traffic during slow periods (which was, of course, why analog happy hour was invented in the first place), instead of surge pricing that penalizes shoppers during high demand. Chatterjee was less optimistic about the possibility that companies would use new pricing methods purely to offer better value to their customers. “‘Surge pricing’ is a dirty word,” he says. “Companies are trying to figure out how to do it without saying it.”
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