Financial Fact: What Is Dynamic Pricing and How Does It Affect You?

What's in This Article?

• A definition of dynamic or competitive pricing
• The role of online shopping 
• Factors in setting prices
• Examples of dynamic pricing and the mixed benefits

With high inflation, many of us have adjusted our spending habits in response to the elevated prices. Nonetheless, it can be frustrating to pay so much for the most basic items in our pantries and refrigerators. You may have heard about the factors contributing to inflation on the news. Yet, these are not the only reasons prices are so high. 

Dynamic or competitive pricing also plays a significant role in keeping the cost of living elevated.  According to a recent article in U.S. News & World Report, dynamic pricing can be defined as “a pricing and profit strategy that businesses use to sell to different groups of people, a tactic that’s tied into supply and demand, with a lot of emphasis on demand.”¹ It’s common knowledge that when there is less demand for certain merchandise, prices fall and stores offer discounts on those products.  Discounts are also offered to specific groups such as seniors and students. 

In this sense, dynamic pricing is not a new concept.  Most of us have benefitted from it in one form or another.  For example, if you’ve ever taken advantage of the early-bird menu at a restaurant when the prices are reduced during slow hours or slow days, then you’ve experienced one way that competitive pricing is used in response to decreased demand.  

But with the dramatic rise in online shopping, dynamic pricing has taken on increased significance.  In response to the COVID-19 pandemic, consumers increased their dependency on online shopping and e-commerce businesses.  As online shopping has skyrocketed, dynamic pricing is being used to increase revenue and profits by setting prices that reflect the current market conditions and the perceived value of the product or service to the customer.  Businesses continuously adjust prices from moment to moment in response to real-time demand.  Consumers can pay one price for an item when there is a surplus, but that same item can be more expensive an hour later or even in a matter of minutes when supply has dropped, and demand has increased. 

Multiple factors come into play when setting prices including the time of day, the day of the week, the demand for the product or service, the availability of the product or service, and the competition.  Businesses utilize computer algorithms to adjust prices in response to what people are willing to pay for a product. 

Some examples of dynamic pricing include the surge pricing practiced by some ride-sharing companies, and airlines changing prices based on the number of seats sold.  Taking this concept a step further, as online retailers collect data on your preferred brands and products, depending on supply, you could be offered a higher price on an item you regularly purchase because of your perceived willingness to pay more.  Another person may be offered a lower price to generate their interest in that same product.

With brick-and-mortar stores, dynamic pricing is responsible for consumers finding higher prices in one neighborhood and lower prices in another when they shop at popular store chains. It’s pretty clear that there are mixed benefits for consumers.  On one hand, dynamic pricing can be beneficial for consumers because it can help to ensure that prices are fair and reflective of the current market conditions.  On the other hand, it can be unfair and exploitative, but dynamic pricing is here to stay because it increases profits. Ultimately, this means consumers need to be savvy shoppers who are willing to compare prices at several stores and do their own “market research.”  If you are not doing so already, you’ll need to shop at more than one supermarket or drugstore chain or more than one website to get the best prices available.

Sources:

1. (https://money.usnews.com/money/personal-finance/articles/what-is-dynamic-pricing)

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