Everything you need to know about dynamic pricing

Dynamic pricing is a trendy term in the marketplace. But what does it mean? It's a blanket term that describes how competition, time of day and even the weather can affect prices.

Chris Keane/Reuters/File
A customer carries shopping bags at South Park mall in Charlotte, North Carolina. Understanding dynamic pricing can help you save this holiday season.

Dynamic pricing is a marketplace buzzword that has been around for a while, though it's being bandied about with increasing frequency as of late. Whether you're a consumer already planning your holiday shopping budget or just looking to save money on your regular household expenditures, it's important to understand what dynamic pricing is and how it can affect you.

What Is Dynamic Pricing?

Dynamic pricing is a blanket term for any shopping experience where the price of an item fluctuates frequently based on complicated algorithms. A retailer might frequently change the price of an item based on consumer demand, price fluctuations at a competing retailer, or even the time of day and weather conditions.

Dynamic pricing is the reason that the cost of everything from airline tickets to home electronics can vary so much from day to day, or from week to week. With the increased popularity of dynamic pricing models, consumers now need to factor in when and where to shop.

But leveraging dynamic pricing to your best advantage requires knowing what industries are most invested in these algorithmic pricing plans in the first place. 

Dynamic Pricing Is Everywhere

Dynamic pricing can be found in a wide variety of industries. In certain grocery stores, the price consumers pay for the exact same product can differ based on personal data collected through loyalty card programs. In an industry where profit margins are thin, retailers are basing their prices on the behaviors and habits of their shoppers.

Perhaps more familiar, the travel industry has been using dynamic pricing schemes for years. Any seasoned traveler can tell you that getting the lowest airfare often comes down to a combination of buying tickets on the correct day of the week, at the right time of day, and the correct number of days before your scheduled departure date. (Did you know the best time to buy airfare is six weeks in advance?)

Electronics retailer Best Buy is also committed to a dynamic pricing strategy, as Amitabh Biswal, Merchandising Operations Manager at Best Buy Canada, recently explained at this year's Shop.org Summit: "It has become very easy for a customer to research prices," he explained. "If a customer is able to get a price online, they should be able to get it in the store as well. So we're able to respond and react to competitive [competition] more quickly."

One segment wherein dynamic pricing has become hugely influential is professional sports. While real-time pricing has only become widespread in pro sports over the last couple of years, sports fans are now able to get better deals on tickets than ever before. For example, the St. Louis Cardinals set their ticket price algorithms based on factors like team performance, pitching match ups, weather, and ticket demand. In their 2012 season, tickets were priced for $10 or less for three-quarters of games played at the team's home stadium. For loyal fans, these reasonably priced tickets took the sting out of paying through the nose to see a game played in the rain or during a slump, and increased the likelihood that fans would return for another game later in the season.

Happy Shoppers, Sad Shoppers

Of course, for every consumer who scores a great deal thanks to dynamic pricing, there is a consumer who misses the window on a great deal and suffers buyer's remorse when an item's price drops.

Most famously, Amazon dropped the price of a Star Wars Blu-ray box set to just $70 before ratcheting it up to $134 a few weeks later. Those who bought the box set for the higher price likely felt the burn of disappointment when they realized they overpaid by over $60!

How to Take Advantage of Dynamic Pricing

There are plenty of dynamic pricing "horror stories" out there, from the short-lived Coke vending machine concept that adjusted the price of an ice cold soda based on the current heat index to Orbitz selectively displaying pricier hotels in its search results based on a user's internet browser, as well as Amazon's failed attempts at selling DVDs at different prices also based on internet browser usage. In the latter case, consumers were at least reimbursed the price differences, which is an encouraging consumer-friendly trend.

But consumers can actually avoid falling into dynamic pricing pitfalls. The best recourse consumers have is a two-fold strategy. First, do your research and compare prices, and familiarize yourself with consumer price trends before you buy. Secondly, and perhaps most importantly, be vocal. If you're shopping in a store and you've seen an item at a lower price elsewhere, ask if the store will match the price. Many stores offer price matching, especially during the holidays.

The bottom line is that retailers need customers to stay in business, and ever-changing pricing models can benefit both parties. So much of the average dynamic pricing algorithm depends on customer demand that it also makes sense to shop ahead of the crowds, or hold off for several weeks after the product's initial release date.

Self-educate where you can, and shop with caution at retailers that have new dynamic pricing programs that may still have some kinks in their algorithms. Just be aware that the next time you give your ZIP code to a cashier, you may be giving them the data they need to adjust dynamic prices in your area.

Readers, have you ever been burned by dynamic pricing, or are you a master at scoring big discounts? We'd love to hear your dynamic pricing shopping stories in the comments below.

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