Dynamic yet fair pricing

Dynamic pricing refers to the setting of prices frequently based on changing supply or demand characteristics (Nagle et al, 2011:137) and it has received copiously news coverage, mainly due to the surge pricing strategies of UBER? and the online pricing tactics of Amazon.com?. Additionally, there are increasingly new applications of dynamic pricing with startups such as Beyond Pricing (for the AirBnb? service) and Feedvisor? (for managing Amazon.com? listings) that suggest that dynamic price will keep evolving.

However, as captured from the discontent created by UBER?, dynamic pricing that goes over the latitude of fairness is bad. Well, is bad as long as we are the ones paying the price. As an example, Enjoy? (www.goenjoy.com), the brainchild of the former J.C. Penney’s CEO and former Apple? exec, is implementing surge pricing (or surge pay) for workers. It means, there is a higher pay during busy hours or when workers are not scheduled to work, yet, the consumer, still pays the same $99 for the service. This form of surge pricing is perceived as good.

The use of dynamic pricing in a careless way can evoke negative emotional responses from consumers that in turn might alienate current and future consumers. There are authors that suggest that these negative emotional responses arise from consumers aware that price discrimination is happening (Hinz et al, 2011). Other authors argue that uncertainty and the nature of the transactions are the main drivers of the unfairness perception that brings up these negative responses (Haws & Bearden, 2006). More, there are who believe that situational factors (or contextual factors) such as competitors (or even the media) qualifying the seller as a selfish opportunist might increase the likelihood of these emotions (Kalapurakal et al, 1991).

In any case, sellers must take into the account the Dual Entitlement principle (Kahneman et al, 1986a, 1886b) that estipulate that consumers believe that they are entitled to a “reasonable” price and sellers are entitled to a “reasonable” profit. Any deviation from this “reasonable” point might result in consumers perceiving sellers as “greedy” or sellers perceiving that they are “leaving money on the table”.

Dynamic pricing might pose a fantastic opportunity for sellers but it need to be carefully managed so it won’t alienate consumers. At the end, it is just matter of perception of fairness. Just be fair with your dynamic pricing and your consumers will be happy.

References

Kahneman, D, Knetsch, J and Thaler, R (1986a), "Faimess and the Assumptions of Economics," Journal of Business, 59(4), 85-300.

Kahneman, D, Knetsch, K and Thaler, R (1986b), "Faimess as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, 76(4) (September), 728-741.

Kalapurakal, R, Dickson, P, & Urbany, J 1991, 'Perceived Price Fairness and Dual Entitlement', Advances In Consumer Research, 18, 1, pp. 788-793

Haws, K, & Bearden, W 2006, 'Dynamic Pricing and Consumer Fairness Perceptions', Journal Of Consumer Research, 33, 3, pp. 304-311

Hinz, O, Hann, I, & Spann, M 2011, 'Price Discrimination in e-Commerce? An Examination of Dynamic Pricing in Name-Your-Own-Price Markets’, MIS Quarterly, 35, 1, pp. 81-A10

Nagle, T, Hogan, J, Zale, J, “The Strategy and Tactics of Pricing”, 5th. Ed, Prentice Hall, 2011