Retail Practices | Topics

Dynamic pricing: Is the price right?

By : Julie Barlow

For a century and a half now, retailers have been adjusting prices depending on the time of day, the season of the year or how much of the product they have in stock. Today, faced with algorithms that can manipulate prices, consumers are less likely than ever to find deals.

If you take your kids to Disney World during the March break, tickets for the world’s most famous amusement park will probably cost you 20% more than they would during low season. Similarly, you can expect to pay much more to fly to Paris in July than you would for the same seat on a plane in January.

Most consumers are used to this kind of price adjustment, which is known as “dynamic pricing.” In accordance with the law of supply and demand, prices can rise and fall depending on the season, the time of day or even traffic conditions. With the advent of the Internet, however, businesses are now equipped with a tool they can use to tailor prices to what they think individual consumers are able to pay. One major office supply store was recently discovered to have reduced its prices for customers who lived less than 20 minutes away from its nearest competitor. Travel sites are known to jack up the price of flights based on the customer’s browsing history: they can see when you check prices on their site, so they know what destination you are shopping for and how interested you really are.

Dynamic pricing has become so sophisticated that it’s almost impossible for consumers to benefit from it. That was the conclusion of the 2017 report by the Consumers Council of Canada, Dynamic Pricing—Can consumers achieve the benefits they expect? which attempted to determine whether consumers were being harmed by dynamic pricing and made recommendations about how they could be protected.

The new dynamic practices we were seeing a couple of years ago struck us as offensive and opportunistic.”

Howard Deane, a chartered professional accountant and former Canadian Chief Knowledge Officer at KPMG, who authored the study

An uneven Playing Field

In the study’s survey of 600 Canadian consumers, participants said they thought “traditional dynamic pricing”— senior discounts, volume discounts, loyalty programs or price matching—were fair, and trusted them. Participants were less trusting when it came to “technology-enabled supply and demand” —such as surge prices, Amazon’s frequent price changes and even their premium pricing policy of keeping prices artificially high to make consumers believe items are more valuable than they really are—but at least they understood them. However, when asked about the most recent dynamic pricing techniques, such as businesses using demographic, behavioural and personal information such as browser histories to tailor prices to individual consumers to fix the price of items, participants were mostly unaware the practices even existed.

The biggest problem the study found was that consumers don’t stand a chance of benefitting from technology-enabled dynamic pricing, especially in its most sophisticated forms.

There’s nothing new about advertising prices. Before the Industrial Revolution, the idea of an advertised price didn’t exist: consumers negotiated everything they bought. It was only in 1861 that a Philadelphia shop owner, John Wanamaker, placed the first price tag on goods. It didn’t take him long to realize he could adapt his prices to match supply and demand, sometimes targeting specific customers. This is the basis of traditional dynamic pricing.

But the digital revolution has completely changed the rules of the game by allowing retailers to use “big data” to tailor prices. The authors of the Dynamic Pricing report found consumers didn’t know or understand these practices.

We are reading things like the travel company Orbitz sending people who use Macintosh computers to different sites than people who use PCs. People pay more for Mac equipment than they do for IBM, so Orbitz assumes they will pay more for travel. They aren’t the only company doing this.”

Howard Deane

The authors concluded that in the game of technology-enabled dynamic pricing, the playing field was entirely skewed in favour of business. It’s harder for customers to shop for deals because the prices are constantly being changed to match individual profiles. The study found that businesses using demographics to tailor prices increased their profits by 0.8% while businesses using web browsing data to tailor prices to individuals improved profits by more than 12%. In fact, technology-enabled dynamic pricing is transforming the retail market, Howard Deane claims. “That’s why everyone wants you to have their loyalty cards. Businesses want to send you a receipt for your email. They ask you to do an online consumer review. It’s all about getting customer data,” Deane says.

Participants in the study said they felt vulnerable about online shopping because they didn’t know how long online prices would last. One expert cited in the study concluded that, “People need assistance and even protection to aid in navigating what is otherwise a very uneven playing field.”

Yet curiously, Dynamic Pricing found that businesses feel they have no choice in the matter. “Technology-enabled dynamic pricing is so attractive and profitable to retailers that they ignore it at their peril,” says Howard Deane. The study found that retailers “are getting advice and pressure from consultants and those with access to relevant software and data to enable the more complex methods of dynamic pricing.”

The Power of Algorithms

Things are not going to get better. Howard Deane predicts that sophisticated dynamic pricing methods will make it impossible for consumers to get deals. “The algorithms used to determine prices for different consumers are extremely complex and powerful. But what scares me is that they can change themselves to constantly adapt.” Consumers will be helpless in the face of these, he says. “We might get to a point where no one can figure out what the algorithm being used to set tailored prices is. At the moment, there’s no law against that,” says Howard Deane.

Not that consumers have much recourse in the face of dynamic pricing. The report finds: “Regulatory efforts are minimal and do not address some of the concerns that individuals may have.”

Howard Deane thinks the only way to protect consumers is to oblige businesses to be transparent about their pricing practices. “Businesses need to bring the salient points about what information they are taking, and using to determine pricing.” In other words, business should be required to post privacy policies alongside their marketing material, and in language that is as easy to understand. “But it’s not going to change until customers push back and ask.”

The report nevertheless concludes that there are some things consumers can do to protect their privacy and pay fair prices. For instance, they should think very carefully about what information they’re giving away. “It’s not always necessary to supply your email address to get a deal,” says Howard Deane. To get a fair price, Deane recommends consumers return to the methods of traditional dynamic pricing, including shopping in stores. “Amazon is not necessarily the cheapest. Go for the volume discounts. Go for the traditional discounts. The senior discounts are significant. You can save a staggering amount of money.”

And for online purchases? “Enter the marketplace. Do your research. You need to get a sense of what a good price is.” While the Industrial Revolution introduced price tags, the Digital Revolution might be sending consumers back to the days of haggling.

The Study

Produced by the Consumers Council of Canada in 2017, the study Dynamic Pricing—Can consumers achieve the benefits they expect? examines consumers’ knowledge and awareness of the risks of dynamic pricing. The goal of the research was to determine how lack of awareness, misleading practices and misuse of dynamic pricing are hurting consumers, what to do to prevent this, and what business and government should do to ensure consumers’ rights are protected.

Through focus groups, an online survey and key informant interviews, the study concludes that consumers have low awareness of the way business are using personal and demographic information to determine the prices of retail goods. Technology-enabled dynamic pricing is creating an uneven playing field slanted almost entirely in favour of businesses.