Dynamic Pricing
You may not have heard of dynamic pricing, but it's possible
you've already been subjected to it as a consumer. Also called
"price discrimination," it is the holy grail of pricing
strategies for businesses. Essentially it's a way to get the
most profit for a product or service by charging different amounts
according to how much each customer is willing to pay.
Dynamic pricing has been around for a long time in various
forms, but it has been difficult to implement in most industries.
However, Dr. David Effrig, in his newsletter, "Retirement
Millionaire," recently reported that this strategy of charging
different prices to different customers has become much more
common online. Before I get to how to deal with this, let's look
at the basic concept and how it works.
There is a basic dilemma in pricing a product. Suppose, for
example, that I am perfectly willing to pay $50 for a pair of
jeans that a company makes. They might wholesale the jeans to
stores for $30, and after a manufacturing cost of $6 they make
a $24 profit. The problem is, they may not make many sales. They
could wholesale the jeans for $12, so the stores can retail them
for $20, and sell many more. This may be better, because even
though they make only $6 per pair rather than $24, they may sell
five times as many jeans.
But of course they hate to lose that $24 profit they could
have had from me and others willing to pay the $50 price. What
they would prefer is to sell them to some customers for $20,
and to others for $50, according to how much each customer is
willing to pay. They would love to be able to practice such "price
discrimination." It is difficult with jeans, although one
way it has been done is to have expensive products in high-end
stores while selling the same jeans at "factory outlet"
stores. To some extent, then, the customers self-segregate themselves
and pay accordingly. Those who try to pay the least for everything
will go to the discount stores.
Of course, it would be a dream come true if a retailer could
have dynamic pricing in the same store. If they could just read
your mind as you walked in the door, and then have the prices
you see change as you walk up to the racks....
The internet has made this possible to some extent. Huge quantities
of information are gathered as we surf the net, and now when
we buy a few expensive products, the cookies in our computers
can tell the next site we visit to show us the page with the
higher prices, while others see lower prices. We no longer really
know if we are seeing the same page and same prices as other
visitors to a website.
One way to deal with this is to clear the cookies in your
browser before you go shopping. Since doing this is different
for each browser, I will forgo the instructions here and send
you the following site:
http://www.aboutcookies.org
That will not always resolve the problem though. If you have
previously shopped at a website they may track your IP address
and buying habits and market to you accordingly. If you suspect
this is happening, you can always go to the site from a computer
at a friend's house, a public library, or from your laptop at
a coffee shop--after clearing the cookies again. Note if everything
looks the same and the prices are the same.
More About Dynamic Pricing
The concept of dynamic pricing is not in itself nefarious.
It is just another way to market and sell products and services.
If you market to rich people you would naturally try for higher
prices since they can afford to pay more and usually will. Meanwhile
you might offer discounts to customers who can't otherwise afford
your product. A plumber, for example, might use this strategy
to keep his business viable. If that means he can pay higher
wages or hire more employees, we might look at it as a "market
theory of income redistribution,"
Last week I was subject to dynamic pricing in one of the more
common forms: I upgraded to faster internet. I'm fairly sure
that to give me 30 mbs or 18 mbs download speeds costs the cable
company the same. Most likely they purposely slow down the lower-cost
service, so those who want to pay less will still buy their service,
while those (like myself) who need the speed and can pay the
price will do so.
This is more common than you might think. Many companies offer
slightly different products so that the customers segregate themselves
and pay according to affordability. And yes, there have been
numerous cases documented where they effectively sabotage the
product in order to sell a lower-priced version without losing
the higher-priced sales--even if that means it costs more to
produce the version they sell for less. That's been a method
of dynamic pricing for decades.
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