Let’s talk about dynamic pricing.

In my experience, most of the hesitation experienced by potential adopters of a dynamic pricing strategy stems from a fundamental misunderstanding of what exactly dynamic pricing is. When I sit down with managers, that misunderstanding manifests in one of two ways. In today’s post, I’ll be discussing the first of these misunderstandings, and we’ll dive deeper into the second in the future. 

Sometimes, managers don’t have any familiarity with dynamic pricing. Maybe it’s not widely used in their industry, or maybe they are new to the industry. I like to suggest to these people that they are mistaken in thinking they don’t know anything about dynamic pricing. At its core, dynamic pricing is more than computer algorithms and data science; it’s basic economics.

When you visit a grocery store and notice the price of oranges is higher than it was last week, when you stop by the gas station and smile because it now costs less to fill your tank, or when the value of a preprinted championship t-shirt celebrating the wrong team instantly drops to next to nothing: it’s basic economics. Even managers who claim to have no experience with dynamic pricing are certainly aware of the same principles at work in their businesses. When the weather forecast shows storms at the waterpark and no one shows up, when attendance on a weekday is substantially less than on a weekend, or when a competing venue opens across town, chipping away at market share; it’s basic economics. Off-peak, bad weather, or days with lots of alternatives force attractions to compete on price. On the other hand, population growth, quality improvements, successful marketing campaigns allow attractions to command a higher price. 

A good manager is aware of what’s happening in the community, the industry, and across the nation and uses this information to set ticket prices to current market conditions. Ideally, prices react to all new information. Because prices are free to change according to market conditions, the price is not fixed and becomes more and more dynamic. If prices do not adjust, firms are simply leaving money on the table. 

Of course, a manager’s ability to digest swaths of new information and appropriately react while overseeing day-to-day operations is limited. Just thinking about the vast amounts of data can be unnerving. This is where we leverage the capability of modern computing. In a way, a dynamic pricing platform is an extension of the manager. It collects data and uses this information to 1) learn how the market responds to prices at certain conditions and 2) maximize revenue. Unlike the human manager, however, it is unburdened with requests from human resources and can remember every detail of every day: the ticket price, the number of tickets sold, the weather, etc. 

So, like I said previously, dynamic pricing is surprisingly simple from a conceptional standpoint. It’s the process of tailoring ticket prices to constantly changing marketplaces. I hope that I’ve been able to clarify one of two common misconceptions about dynamic pricing. If you have any questions about this or would like to discuss more, please contact us!

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