When we go to a grocery store, we see the price posted for a box of cereal. The price doesn’t vary from morning to night, it doesn’t change based on the number of boxes sitting on the shelf. About the only thing that will affect this price you pay is if you happen to hold a coupon.
Imagine a different world… Think how you would feel if the price of the cereal varied based on which day of the week you consume it. In theory, cereal might be more expensive on weekdays than weekends. Would this change your eating habits? What if each box of cereal was priced differently? For those that took the first box on the shelf, cereal would be more expensive and if you came late at night and picked up the last box it would be less expensive. Would this change you shopping habits? Consider if the grocery store charged you more for your cereal than the person behind you because you lived in a more affluent neighborhood. Would you start buying from another store?
More and more companies are using a scientific approach to pricing. It all started with the airline industry and deregulation in 1978. Prior to deregulation airlines had a set number of seats to sell, each seat had essentially the same cost, the airlines just took orders and sold what they could. The only exceptions were coupons and discounts for senior citizens and students.
After deregulation, American Airlines started a new trend with a computerized approach to pricing. Their system was called Dynamic Inventory Allocation and Maintenance Optimizer. With this system they were able to track consumer habits and they began segment their customers. They recognized they had several categories of customers including leisure travelers and business travelers. Based on this data American learned to predict seats on each plane would be sold in advance to the leisure segment and how many would be sold on short notice to business travelers. Once they were able to predict how many high revenue seats they were likely to sell they could set pricing accordingly. When the high priced seats are sold they begin discounting the remaining seats. Over the years they have become more sophisticated and continuously shift the portion of seats in each category trying to maximize profits and sales.
Dynamic pricing also know as yield management started with the airlines but is now being adopted by a growing number of industries. Any business model with similar challenges; limited capacity, volatility of demand and service based would be a likely adopter of this approach. Cruise lines, hotels and car rental agencies are now taking this approach.
Is dynamic pricing legal? Yes, in most cases, and it is and it is much more prevalent that you may realize.
Based upon my research the only time that dynamic pricing is illegal is when it the price is determined based on legally protected categories such as race, sex or religion. Although, I find it odd that discounts for senior citizens are not illegal since this is in effect discrimination based on age.
Dynamic pricing is also used in the property rental industry with some odd exceptions. Due to the Fair Housing Act Law customers cannot be differentiated at the time their requests for housing are made. In effect this means a company renting property must provide price parity based on the unit type, lease terms and move in date. If any of the criteria varies, you may be paying hundreds more than the person that walked in a day earlier, later or moved in at a slightly different time.
Dynamic pricing also occurs online. One buyer reportedly deleted the tracking cookies in his web browser that identified him as a regular Amazon customer. After doing so, the price of a DVD he had looked up dropeped from $26.24 to $22.74. After being identified, Amazon quickly dropped this approach to pricing that CEO Jeff Bezos referred to as “random pricing.”
In the study by the University of Pennsylvania, they found that 64% of American adults who have used the internet recently do not know it is legal for “an online store to charge different people different prices at the same time of day.” And “71% don’t know it is legal for an offline store to do that.”
Not only is there dynamic pricing in place in business today, but odds are you have been a victim of this legal business practice. While it is not clear what logic is used to manipulate pricing, you may have paid more because of your prior internet surfing experience, previous purchase history or the market you live in. Theoretically a company may charge you less because it recognizes you have searched price comparison sites or they may charge you more because you live in a predominately affluent neighborhood.
How can you protect yourself from these seemingly discriminatory practices?
If you have any ideas, I am open to them! I imagine no matter how hard consumers try to mitigate these techniques, corporate tacticians. Awareness however can be a powerful tool. Just being aware that there may be multiple pricing encourages me to search a little more for pricing from mulitple seats. However here are some ideas that may help:
- Don’t let websites retain data, clear the cookies in your browser or consider spyware programs to help prevent companies from tracking your online shopping habits. (Any suggestions of good programs are welcome!)
- If a site requests a zip code or other personal information, try several different codes to see if they offer different prices.
- When you see “customers that purchased this item also bought” you are being profiled in some way. Always sign out and recheck as an anonymous customer to see if the pricing changes.
- Compare prices in person or over the phone to validate the price you have been quoted.
- Try using someone else’s computer or a spare PC at the office. Because the I.P. address is different and the PC won’t demonstrate similar habits pricing may be different.
Have you ever discovered an example of dynamic pricing? If so, what if anything, did you do about it?