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Guest Commentary: Transparency is the key to dynamic pricing
Earlier this year, consumers were surprised and enraged when Uber, a company that allows users to order car services through a smartphone application, charged many times the standard rate on New Year's Eve ("Disruptions: Taxi Supply and Demand, Priced by the Mile," The New York Times, Jan. 8, 2012). This practice, commonly called "dynamic pricing," is expected when you book airline tickets, hotel rooms and is increasingly common in sports ticketing; however it is quickly moving beyond those core industries to enter segments such as electricity consumption, car services, parking spaces and toll lanes.
In professional sports, dynamic pricing means that a weekend game against a league leader will likely be more expensive than a weekday game against a lesser opponent. For electricity, dynamic pricing means that energy consumption in the middle of a hot summer afternoon will be more expensive than at night when most people are asleep. For Uber, dynamic pricing means that a ride on a major holiday is more expensive than your average weekday. Prices can rise and fall multiple times a day or week, based on the market.
Though some may immediately cry foul, the reality of dynamic pricing is that it provides benefits to everyone across the spectrum. If airlines couldn't charge a last minute business traveler a higher price, the truth is, leisure travelers willing to book months in advance wouldn't be able to enjoy bargain fares. With dynamic pricing, that business traveler is assured that, for a certain fee, they can get where they need to go. The same philosophy ensures access to sporting events, reliability of energy delivery and availability of car services.
While Uber's decision to dynamically price and raise fares during New Year's Eve made sound economic sense, their customer-relations problems stemmed from miscommunication. No matter the industry that employs dynamic pricing, clear communication with consumers is a requirement. Consumers need plenty of advance notice with transparent pricing information so they can make informed decisions as to whether they want to trade high-priced premium service for lower prices and the inconvenience of seeing a lesser opponent, changing electric consumption habits or arranging to arrive outside of prime travel times.
As new industries begin to implement dynamic pricing practices, it's important to look at those who are doing it well — like Major League Baseball's San Francisco Giants, who are entering their fourth year of dynamic pricing. The Giants emphasize the importance of price transparency to fans with a grid on their website that highlights lower-priced seating options and notes that all prices are subject to change based on supply and demand. Taking this a step further, the National Hockey League's Washington Capitals feature a Frequently Asked Questions page on their website, to help consumers understand nuances of how dynamic pricing works.
Dynamic pricing is only going to become more prevalent in consumers' lives, with parking spaces, bridge tolls and other live entertainment (e.g., concerts and theater) making the transition as well. The difference between success and failure for dynamic pricing will be decided by how well companies communicate the concept to their consumers.
Doug Mitarotonda is Director, Pricing & Analytics for Qcue, Inc., a company that helps sports teams and entertainment organizations dynamically price their tickets. Prior to joining to Qcue, Mitarotonda worked in the energy industry creating dynamic pricing models and smart grid design at The Brattle Group and auction design for the New York State Department of Environmental Conservation's Office of Climate Change. He holds a Ph.D. in economics and an M.Eng. in computer science from Cornell University.