Author: Gediminas Rickevičius, VP of Global Partnerships at Oxylabs
Dynamic pricing, in one form or the other, has been around ever since people have been exchanging things among themselves. After all, in this most basic setting, the price is negotiated between the seller and the buyer and may thus vary depending on circumstances.
Negotiations between buyer and seller are also the defining factor of the market value of any product or service, albeit on a grander scale. Ultimately, the price of the product is constituted as the middle ground where consumers are willing to buy and the supplier is willing to sell.
On the one hand, dynamic pricing is clearly based on the idea that a product’s or service’s market value is not set in stone. On the other hand, with the surge of dynamic pricing strategies, we now witness a more interesting phenomenon – valuations changing due to the unstable character of pricing.
Scarcity and strategic buying
Special offers are the most familiar (slow) form of dynamic pricing that we, as customers, constantly encounter. Another way in which dynamic pricing has made its mark on the markets is as the staple of the travel and hospitality industries, where factors such as dates might change the value of a service.
Buyers accept them both as understandable price fluctuations over time due to the changing scarcity of certain products. However, they are different with respect to the possible effects on valuations.
Studies of online markets also recognize strategic buying as one of the aspects influencing buying decisions in dynamic pricing environments. When buyers are strategic and recognize the dynamic aspect of prices, it is likely that the perceived scarcity of the commodity will have a great effect on valuation.
These phenomena ground the difference between such industries as the restaurant industry on the one side and the travel and hospitality industries on the other. An opportunity to eat a meal that you like at a restaurant is usually not perceived as scarce. While seats on a plane or rooms at a hotel, when tied to particular dates, are finite.
Web scraping remains the main method of figuring out what sort of pricing strategies are likely to bring the best results. Naturally, companies first and foremost utilize web scraping to watch the prices of the competitors to see whether they have some room to outprice them.
However, web scraping might be even more effective when used to monitor the stock of other online stores. Nowadays, companies tend to freely display the availability of each product on their websites. They do it to avoid situations when only after ordering does a customer realize that the product is out of stock.
Scraping these sites to find out if the competitors are running out of stocks allows them to identify the approaching scarcity of particular commodities. Thus, prices can be adjusted to predict the rising valuation of these goods. And as scraping provides information almost as soon as it is reported online, it will also let the retailers immediately shift back to the lower prices when stocks get refilled.
In turn, such a process induces an overall advantage for the consumer. Outside of monopolies and cartel agreements, dynamic pricing creates near-equilibrium in product value across many different companies, making the competition much more fierce.
A dynamic pricing feedback loop
The rapid spread of information, which is one of the defining features of our times, is also one of the main factors affecting valuation in dynamic pricing settings. While price matching is the most common way to implement dynamicity, rising interests and trends might also play a role.
For example, artificial price changes can be used to boost customer awareness of the product or service. Lower prices for limited periods of time might help the provider to reach the high-valuation buyers it would have not with fixed higher prices. Such a step away from automated pricing algorithms might produce increased attention for the company.
On the other hand, if increased interest becomes apparent, dynamic pricing should be undertaken with care as it can lead to unintended consequences. This happens, for example, when customers realize that someone else paid significantly less for the same product.
Disgruntled customers may ask for businesses to cover the differences, leave bad reviews, or, worse, start shopping elsewhere. As a result, dynamic pricing can lead to a negative feedback loop where changing prices might cause effects that end up costing the company more than the additional profit made.
Since low prices were the main selling point, customers felt cheated when seeing the updated pricing, leading to decreased sales. The speed of the information flow first formed certain expectations, then led to their disappointment on account of the pricing algorithm reacting to changing market value too fast. Yet, negative perceptions often last longer than pricing changes, which can negatively affect the brand’s reputation.
Conclusion
Dynamic pricing affects significantly more than the prices of products and services. As all of them have underlying value, which buyers intuitively grasp, dynamic pricing has the potential to affect it. If price flexibility is perceived as understandable or even beneficial from the buyer’s side, it will raise the market value of products and services.
However, the perceived value will drop rapidly if the buyers feel that they are being taken for a ride. Which will be the case when in the vast volume of information available to them they will not find sufficient reasoning for specific price changes. As a result, improperly implemented dynamic pricing can negatively affect brand reputation.
