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Right now, more companies are experimenting with dynamic pricing strategies to alter the price of a product or service depending on fluctuating supply and demand.

For example, the UK firm which owns Legoland and Madame Tussauds has said it will use machine learning to flex ticket prices depending on weather and demand.

However, there is also a growing backlash as similar pricing strategies creep into more aspects of daily lives, such as buying a burger or drinks during peak times.

The So What

“There is immense interest in dynamic pricing, because business executives have realized the power of pricing over the last couple of years, says Arnab Sinha, BCG’s global topic leader for revenue management.

After facing a long stretch of cost inflation, supply chain disruption, and shifts in consumer tastes, executives are now “taking a step back and asking themselves whether they should be changing their prices more frequently,” he says.

Despite the flurry of media attention, dynamic pricing has been widely used over many years, especially for airline tickets and hotel bookings. More recently, dynamic pricing has been applied to event tickets and ride-sharing apps.

There are some clear customer benefits when companies vary their prices according to the time, person, or product. For example, customers can take advantage of:

  • off-season travel
  • senior citizen discounts
  • supermarket goods reduced at the end of the day

But as price changes become more frequent and less predictable in more areas, it’s becoming harder for customers to see the benefits.

“A company’s ability to use dynamic pricing depends on how customers perceive the price changes,” Sinha says.

“Do customers think the company is just trying to make an extra dollar for itself, or are the price changes tied to something they can see, feel, or experience as a benefit?”

“Data availability helps a company make better decisions on what the price could be,” says Sinha. “What the price should be is a strategic choice.”

Now What

Three actions are key as companies consider dynamic pricing models.

Know your customers. The strongest argument for dynamic pricing is that if customers are different, why shouldn’t the prices they pay be different? Each customer is unique, even if their differences are slight, and each customer’s perception of value is not constant. The more a company knows about each customer, the more it can adjust the price and the value of a product or service to match their needs.

Create a compelling story about fairness and value. Dynamic pricing won’t work if the only thing that customers notice is higher prices, Sinha says. If companies change prices without a corresponding change in value, they risk a backlash if customers perceive those changes to be unfair. Companies should not lose sight of the customer experience and should help them recognize the value that dynamic pricing can create. Prices may rise for some occasions and fall for others—that is the dynamic that can create greater access to goods and services as well as better purchasing options for customers.

Implement the best tools and data. Companies need advanced tools and deep current sets of data to get customer insights and decide when and how to change prices in beneficial ways. The more data and insights companies have, the more they will experiment with dynamic pricing. That’s why the practice is spreading to more and more parts of the economy. But companies also need to resist the temptation to make dynamic pricing an exercise driven primarily by data science and algorithms.

“Dynamic pricing doesn’t change the fact that pricing is about the customer’s perceived value,” Sinha says. “That’s why all business strategy is pricing strategy. You have to bring the strategic lens to the numbers.”