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Dynamic Pricing – Variable Pricing

Dynamic Pricing - Variable Pricing

In the last post, we started talking about common misunderstandings we encounter when we’re talking about dynamic pricing. Today, we’ll be continuing that conversation and contrasting dynamic pricing against another popular pricing strategy.

Managers have told me on several occasions they don’t need to implement a dynamic pricing strategy because they are already using dynamic pricing. When I ask them to share some details of their “dynamic” strategy, we discover they are really using a variable pricing strategy, and they’ve mistakenly labeled it a dynamic pricing strategy. 

Undoubtedly, variable pricing is a tried-and-true strategy widely employed across the attractions industry. I’d guess that most venues today use a variable pricing strategy (if they haven’t yet adopted dynamic pricing). Variable pricing involves separately pricing peak and off-peak days. At most venues, this typically manifests as higher weekend prices relative to weekday prices. The reason why venues can charge more on peak days again comes down to basic economics. Weekdays are relatively less attractive to consumers because the opportunity cost of attending on a weekday – the foregone wages from a missed day of work – are higher than on weekends. This means venues must offer lower prices for tickets on weekdays to compensate for the higher opportunity cost.

Under a variable pricing strategy, operators control for “peak” or “off-peak”, but there are many others that determine the value of a consumer’s visit. For example, days with relatively higher probabilities of inclement weather come with extra risks for consumers, including the possibilities of the venue closing early, missing a chunk of scarce time on the coasters due to lightning, or even just getting soaked in the rain. These risks reduce consumers’ expected enjoyment and their willingness to pay for tickets. Similar conclusions can be drawn when considering the actions of competitors or seasonal effects, like the difference between seasons with heavy traffic from family vacationers and seasons when most travel is business-related. 

A true dynamic pricing strategy, recognizing the multiplicity of factors affecting consumer demand, adjusts prices according to the underlying changes in consumer demand. As a result, it is a far more fine-tuned approach to ticket pricing. Under a dynamic pricing strategy, each day open for admission is priced separately considering market factors and capacity. Days aren’t forced into “peak” or “off-peak” classifications. The dynamic pricing platform collects new information with every transaction, making it possible to learn and adapt as the market changes. The freshness of the data is critical to accurately setting ticket prices.

A variable pricing strategy might be simple to implement, but it falls short of dynamic pricing because there isn’t enough granularity between each day. This lack of granularity, in turn, reduces the revenue potential for a venue. In short, variable pricing is not dynamic pricing. 

Even if you’re not ready to adopt a fully dynamic pricing strategy, you can try to set your venue’s ticket prices with as much granularity as possible. For example, you can have a different “base” price for each month of the year and charge a premium for peak days. Remember, better alignment of ticket prices with consumers’ valuations can increase revenue on good days and mitigate the extent of losses on bad days. You can always contact us with questions!