If you’ve ever tried to take an Uber during a rainstorm or on a holiday, you know why surge pricing can be unpopular. Then again, if you’ve been picked up by that Uber while other people were still waiting for cabs, you know why it also makes sense and provides benefit to customers. Surge pricing which is another name for dynamic pricing, isn’t just for ride sharing; and it is an excellent way to balance supply and demand for your company’s products or services.
Dynamic pricing is a relatively simple concept. It is the principle that the price for a given item or service should vary with customer demand. This means that you can charge more for your product sometimes, but you should charge less other times. It also means that if you have the ability to increase capacity, you will probably provide more of that service when customers really want it, and take advantage of those higher prices. This helps to ensure that the customers who really want what you are selling can find it. It creates equilibrium.
Imagine looking for a cab on New Year’s Eve. If you can find one, you’ll wait a long time for it. Why is that? For cab drivers, the calculus is simple. They charge the same on New Year’s Eve as on any other day and can’t enjoy the holiday with family and friends. So why work harder? They don’t, so it is harder for you to find a cab.
If you hail an Uber, you’ll probably pay a lot more than you would for a cab, but you almost certainly won’t wait as long. Uber drivers know if they work that night, they will not only stay busy, but also get to charge a lot more for their services, so more people work. That’s the power of dynamic pricing, which because of Uber is often called surge pricing.
Dynamic pricing is actually everywhere. Theme parks are now using prices to encourage people to stay home on now-more-expensive, busy summer weekends and come to the park on quieter fall week days. A ticket to Disneyland that used to cost $99 now costs anywhere from $95 to $119, depending on the day you choose. Disney isn’t gouging park attendees, though. Instead, they’re using a pricing system that rewards people for going when the park is less busy and that better matches the price to the value of spending a peak day – like Thanksgiving – at the park.
Movie theaters use a variant of it when they charge more for a Saturday 8 p.m. showing than a 1 p.m. midweek showing. While the perception of most moviegoers is that a Saturday night show is regular price and a Tuesday 1 p.m. show is a discounted matinee, this is just dynamic pricing. You pay more to go at prime time and less at off-peak times.
Ticket brokers like StubHub are also an excellent example of surge pricing. When demand for an event soars, prices increase sometimes to a multiple of the face value. Sports teams also engage in dynamic pricing. Major League Baseball games have variable prices based on demand. Interestingly, their model actually saves customers money overall, since non-surge prices are lower than they would otherwise be.
Fuel prices are variable, too. Every summer, people use more gas for vacations and road trips. This (along with summer additives) causes fuel prices to go up until fall comes and the demand spike subsides. Behind the scenes, it is not uncommon for oil output to also go up in summer as enhanced production comes online to meet demand at higher prices. This not only ensures that there is enough fuel, but also that prices don’t surge too high, dampening demand.
Dynamic pricing is the most efficient way to allocate fixed capacity. It maximizes your profits while ensuring that customers who value your product the most can really get what they want. It applies the basic economics of supply and demand to the product, service or experience that your company sells to find the right price for every situation.
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