Dynamic pricing is a sales strategy that uses an algorithm whereby a company sells its services/products at flexible prices, which vary over time based on certain variables: purchasing habits, type of customer, timetable, number of sales made, competitors' offers, location, etc.
How dynamic pricing works
This marketing strategy, used in many online realities, is widespread in services, air transport and hotel reservations. In the sharing economy, dynamic pricing is used to determine how much a user pays; in sporting events, for example in the United States, the price varies according to the weather or if the team has several victories; in the sale of products online, on stores such as Amazon.
Companies that use dynamic pricing mainly use artificial intelligence and Big Data that take into account the variation in supply and demand.
When we talk about dynamic pricing we have to evaluate three points.
- eCommerce. Online sales have increased the offer by creating an infinite shop, accessible 24 hours a day, always making it possible to compare prices.
- Third party cookies. They allow the behavior and purchasing habits of online users to be profiled, determining "tailored" prices.
- Geoblocking. All those constraints that prevent consumers from making convenient purchases on foreign sites.
Dynamic pricing and airfares
The Dynamic Pricing pricing strategy is widely used by airlines, especially low-cost airlines, with the aim of maximizing revenues.
This marketing technique first appeared in the travel industry in 1985, when the former president of American Airlines introduced "super-saver fares" to compete with low-cost carrier People Express Airlines.
Today, price changes are established by an algorithm that adjusts the rates based on a series of data:
- Objective data relating to the route and specific flight. For example past bookings, number of seats left, average demand for certain routes.
- Data based on a customer profiling strategy. The first level of profiling, for example, is the division between those who travel for work and those who travel for pleasure. For routes usually frequented by business travellers, airlines start selling at low prices to fill minimum capacity and then raise prices as corporate passengers tend to book at the last minute.
The myth of last minute savings is increasingly distant because businessmen buy at the last moment by raising the cost of the ticket, especially 10 days before the flight.
Marco Alderichi, a professor of economics at Bocconi who is conducting research in this field, states that airlines usually divide the seats available into two parts: some at a lower price while others at a higher price, specifying: -“Man as seats are sold, those in the highest booking class remain. So the price will go, for example, from 20 euros to 30 euros simply as a result of the fact that some tickets are sold”-.
But then why can prices go down? -“Because usually what the airline does is not to move the seats from the lower classes to the higher ones, but the opposite: it takes the seats from the higher classes and moves them to the lower classes. So he slowly begins to sell off the price of the seats in order to be able to sell them all".
Finally, the teacher concludes by stating that the best time to buy a plane ticket is a month and a half beforehand, especially at night.
The myth of last minute savings, the purchase of a trip at the last minute, is therefore becoming increasingly blurred.
Privacy and limits on use
The new EU Regulation 2016/679 on privacy allows the profiling of users only with their explicit consent, while in some cases dynamic pricing practices on the internet can be considered unfair pursuant to Directive 2005/29/EC.
In Italy, the Antitrust can decree fines of up to 5 million euros, while with the new European Regulation the Privacy Guarantor will be able to impose fines of up to 20 million euros or 4% of the offenders' turnover.
Best practices to defend against dynamic pricing
Here are some tips to avoid paying higher prices.
- Browse in incognito mode.
- Block consent to the use of third-party cookies.
- Disable the gps on the devices used and experiment with the use of a VPN to hide/modify the navigation source.
- Use a proxy server for e-commerce browsing to hide the IP address, the geographical area of origin and the most viewed products.
- Use price trackers (software that constantly track the price of a product) and comparators.
- Leave the selected products in the cart, monitoring the price changes.
E-Business Consulting, a digital marketing agency active since 2003, deals with marketing and communication at 360°. To find out more about the dynamics of the eCommerce world, come and visit us on 17 and 18 May at the Netcomm eCommerce Forum. We are waiting for you at stand A13!