Dynamic pricing

Dynamic pricing is when businesses adjust the price of products or services in response to supply and demand. If lots of people want to buy, and there isn’t enough to go around, prices can go up. If you’re buying when others aren’t, you might get a bargain.

Dynamic pricing has been around for decades across a variety of industries. For instance, airlines often raise the price of flights during holiday seasons and hotels in major cities or near entertainment venues may charge more for booking a room when events are taking place.

Equally, airlines and hotels may offer low ‘off peak’ rates and restaurants often offer lower prices to those happy to book outside peak dining hours. Consumers feel the benefit of dynamic pricing through, for example, cheap midweek hotel room deals, early bird specials or happy hour offers.

Dynamic pricing can also be used for electricity use, where consumers are offered different prices throughout the day based on the Irish wholesale market. This means that consumers can make savings on their energy bills by opting to use appliances during off-peak times.

In some industries, dynamic pricing is designed to increase capacity to the benefit of consumers. For example, with ride sharing apps, a significant increase in prices might encourage more drivers to log on for work, which increases availability of drivers and reduces potential response time for passengers.

What is surge pricing?

Surge pricing is a term sometimes used to describe a sudden and large increase in prices, often as part of a dynamic pricing approach. This can lead to dissatisfaction among consumers, who may consider the price increases unfair. Businesses need to take care that consumers do not see surge pricing as a form of ‘gouging’, as they may suffer reputational damage.

Dynamic pricing versus other pricing models

While dynamic pricing allows prices to adjust based on demand, there are several other pricing strategies used by traders.

Fixed pricing: This is where the price of a product remains the same over time, regardless of changes in the market.

Tiered pricing: This is where businesses can offer more benefits for a higher price, allowing customers to make a choice about what they’re willing to pay. Examples include an airline seat with extra leg room or a subscription service with additional content.

Personalised pricing: This strategy sets prices based on individual customer data such as purchase history. For example, a consumer who places an item in their online shopping basket but does not complete the purchase may get an email offering a discount for the same product.

Group pricing: This is when the same product is offered at a different price to a specific set of consumers, for example discounts for students.

Why is dynamic pricing used?

Businesses use dynamic pricing to respond to market demands in real time. This allows them to balance out sales of stock or services at different times of the day, week, month or year.

In certain industries, such as travel and hospitality, dynamic pricing is a normal strategy that allows businesses to maximise the number of consumers who use their product and make more efficient use of their assets.

For example, airlines can use dynamic pricing to offer cheaper flights to beach holiday locations outside the summer months. Hotels can use it to offer rooms at a lower price during off-peak periods to encourage bookings when demand is lower. Hotels may also offer lower prices for last-minute bookings to avoid having empty rooms. This is good for business and the consumer.

What consumers need to know

Dynamic pricing can be extremely beneficial to consumers, who can reap the benefits by, for example, using appliances when electricity is cheapest, making restaurant bookings for early in the evening or buying their holiday well in advance when demand is low. This model allows consumers to secure goods and services for lower prices than if fixed pricing were used.

While this model allows consumers to enjoy lower prices, it also means prices can go up dramatically with a sudden increase in demand, sometimes leading to consumer frustration.

Is dynamic pricing legal?

Dynamic pricing is not currently defined under Irish or EU consumer protection legislation and, in most cases, it is not prohibited.

However, as with all pricing strategies, misleading or unfair practices that pressure consumers into making a purchase they may not have otherwise made may be illegal.