On a recent flight to attend a gift show, I discovered that my seat-mate had paid less than half the amount for her airfare than I had paid for mine.  Welcome to the world of dynamic pricing! Technically dynamic pricing means that the price of an item is determined by a specific customer’s ability to pay.  In actuality, it means that prices are set based on what a specific customer is willing to pay. I probably bought my plane ticket later than my seat-mate, when fewer seats were available on the flight that fit my schedule. The airlines knew that I would be willing to pay a premium to go at that particular time.

Basing pricing on what the market will bear is nothing new.  Many of us price products higher while an item is new and demand is at its peak, and then lower the retail as popularity wanes —  until it is sold at a low price in a clearance sale.  Starting with a high price and going down is a common practice.

But dynamic pricing would suggest that we consider that there are factors that might increase the desirability of an item outside of this cycle: umbrellas can be sold at a premium on a rainy day, for example, or licensed team merchandise might command a higher price during a winning season. Setting prices in a fluid manner based on the circumstances is the idea that is at the core of dynamic pricing.

We may think that our customers would find this practice dishonest, yet we accept the fact that restaurants and movie theaters offer early-bird specials (lower prices when demand is lower is the same as higher prices when demand is higher).  Theater goers pay varying prices for their seat, based on date, time and location, as my son Erik Schroeder discussed in a recent presentation at the INTIX conference in Chicago. Customers bid on merchandise on eBay, increasing their offer based on what the item is worth to them. When it comes down to it, pricing is actually very fluid. Yet many of us are wedded to the idea of keystone — doubling the wholesale price to set the retail price.

It’s been shown that many stores cannot be profitable with most merchandise sold at keystone markup, especially since markdowns are inevitable for goods that don’t sell well.  There is also talk of an increase in the minimum wage, which will make it imperative that stores have a higher profit margin in order to be able to afford to pay staff members competitive wages.  Dynamic pricing is one approach that may help your store remain competitive and financially viable in the challenging years to come. You can read more about the concept in this recent article from Stores magazine, sponsored by the National Retail Federation — which argues that we are in an era of “Let’s Make a Deal” rather than “The Price is Right.”

Happy Retailing,

Carol “Orange” Schroeder