Ripped Off? Dynamic Pricing Can Make You Feel That Way

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A friend of mine considered setting up a booth at a state fair in a major city. The fair has a closed bid process. There are a limited number of spots. You submit your bid. The highest bids get the spots. Someone that had been to the fair many times said that he never asks anyone else what they paid for their spot because the one year he did it, he had paid more than double the person next to him. He would rather not know, because he doesn't want to feel ripped off.

According to a new paper, he isn't alone.

Dynamic pricing, in which sellers make frequent adjustments to their prices, has become more feasible as internet buying increases. In the first study to examine how such pricing strategies affect perceptions of fairness, researchers from the University of South Carolina found that fairness judgments about fluctuating prices depend heavily on time and whether the buyer is involved in setting the price.

One of the early value propositions of the internet was the ability to mass customize pricing and extract the maximum value out of each customer. Several companies tried it, and as far as I know, they all failed or received negative customer responses. Now we have moved the other way, as the web usually leads to price transparency.

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Today at lunch a friend of mine mentioned that for all the pro-market talk we espouse, some business models are built on keeping information asymmetric so that transparent pricing doesn't exist. Those models are usually quite profitable.

  • Scott

    Interesting that this pricing setup (take bids, charge whatever the bidders offer) is so close to a Dutch auction (take bids, charge everyone the lowest bid that clears inventory completely), and that the Dutch auction is such a model of fairness.

    Yes, the ‘charge whatever you can get’ setup can be profitable on the surface, but it can cause large amounts of grief for the people who support the internal systems. I’ve spent some time at a company with recurring business; each customer had individually-set unit pricing and individual volume discount tiers. Wow, what a headache to manage – there would have been some significant value in a more open, universal pricing model with volume discounts that could’ve been stored on a one-page document instead of in a database.