Uber is changing the way prices are quoted in Chicago. It now just offers a dynamic fare value rather than a multiplier.
Surge pricing will not change. What does change is the way price is quoted.
Uber’s goal is to make a ride available at the push of a button even on the busiest day of the year. This means they need to have surge pricing in place to create the necessary supply.
This action underlines how valuable it is to match supply and demand to satisfy market needs.
I’ve wondered for a long time why theaters keep raising prices for their tickets even though so many seats are left empty. Finally Atom Tickets will ensure that theater seats are filled more often and priced more reasonably.
Hopefully these algorithms will quote low prices to flexible people just like leisure travelers can buy cheap airline tickets.
In our work with Shopify stores, we find that there is a lot of room for revenue growth by pricing using smart algorithms. Even a simple A/B test can raise profit by well over 25%.
Profitability can be further improved by selectively offering discounts only under the conditions where the discount changes buyer behavior.
Companies currently using dynamic pricing include:
- Qcue which improves pricing for sports tickets by making seats available to fans for much cheaper during many games.
- Liftopia which dangles discounts in front of on-line shoppers that shop in advance.
This article explains various interesting aspects and applications of dynamic pricing.
I read a fascinating interview (linked below) in which co-founder of Price Intelligently Patrick Campbell strikes at the assumption that prices need to be set in stone.
We both find it painful that companies work very hard at their product and marketing, but have a hard time monetizing because of a lack of tools necessary to determine prices.
The gap between potential revenue by pricing optimally and actual revenue can be enormous. We’ve noticed differences of 30% or more in revenue between prices that are nearly identical from the perspective of the business !
I often get this question. Is price discrimination legal?
Arie in the article linked below says it is certainly legal.
He also discusses the types of price discrimination.
Many people seem to think it is illegal but it certainly is legal in the US if price discrimination is not based on race, age, sex etc.
I found a fascinating podcast at NPR Planet Money about the life of the price tag. Apparently it has been a short one so far.
Link to: The NPR Podcast
Price tags were not common before the 1800s. NPR story says that the … “the price tag world we live in now is a bizarre aberration”
Once upon a time long long back, there was a haggler in each store who offered different prices to people based on what they looked like.
This is still the story in much of the not-so-western world. I was in Singapore last year and my hosts told me that I was being quoted the “foreigner price” for a Durian (an exotic local fruit).
Efficiency was the mother of the invention of the price tag. The haggler needed to know a lot. How much was paid for the item, how much different people are willing to pay. You couldn’t hire an unskilled person to do the job. So eliminating the role meant that stores could scale and become a lot bigger and more efficient than smaller stores.
Now, the fact that sophisticated computer algorithms can do the job of the haggler is killing price tags. So, airlines use algorithms to quote prices because it improves profits. Amazon uses algorithms to price their goods. AirBnB uses Aerosolve to help their clients improve pricing.
Algorithms are taking on the role of the haggler.
Air B&B uses Aerosolve a machine learning platform to learn from past data and help people price their apartments correctly.
They have built models that are easy to interpret by using additive functions to model price.
The great article below explains how one might create dynamic pricing models.
Article on Aerosolve.
There is also a long list of companies that do pricing for real estate.
The optimal price is a function of the price-sensitivity of the consumer demand and the cost to the business to deliver each additional item.
The life cycle of a product includes 4 stages.
At each stage the product appeals to a different set of customers. Their price-sensitivities can differ significantly.
Other time related factors that change price include:
- Seasons: Winter is better for fur coats and tire chains.
- Time of day: Restaurants and golf courses can adjust prices to reach a larger population.
- Ad campaigns: Ad campaigns affect the optimal price by changing consumer demand.
An optimal pricing strategy would modify price in response to changing consumer behaviour.
This is only possible with constant experimentation and price update.