Here are some interesting stories about products, services, and their prices.

• Uber and Ola, the taxi aggregator services, adopt a “surge pricing” policy to manage rush-hour demand. Simply put, this means that during peak hours, when taxis are typically in short supply, a cab ride can cost you three to four times the regular price. This “surge price” is thrown up by your mobile phone app, to enable you to decide whether you are willing to fork out the higher price. Fares charged as low as ₹7.50 per km during non-peak hours could surge to ₹40 per km during rush hours. Some consumers are complaining, but an increasing number of people continue to use Uber and Ola.

• Many years ago, the CEO of The Coca-Cola Company referred to smart vending machines that would charge consumers a higher price for Coke cans on hotter days. In other words, the price of a Coke would depend on the temperature in your city. The vending machine would have sensors to record the temperature, and an algorithm would then automatically decide what price to charge. There was an immediate consumer backlash. The company backed down quickly.

• Pubs in Bangalore routinely offer “happy hours” pricing for beer and other drinks. All you have to do is order these drinks prior to a scheduled time (say, 8 pm) and you get two drinks for the price of one. This ensures that these establishments get many more consumers to come in during time slots traditionally considered off-peak for consumption of alcohol. A site on the internet even lists “the ten best pubs with the happiest happy hours in Bangalore.”

• A global airline has been reportedly charging its frequent flyers higher fares compared with those for infrequent flyers. The logic appears to be that the frequent flyers most often fly out of necessity, or on business travel, and are willing to pay a higher fare because they have little flexibility on date and time of travel. On the other hand, infrequent flyers are more likely to shop around for the lowest fare, and are perhaps more flexible on specific aspects such as date of travel. Many frequent flyers would consider this pricing policy patently unfair.

• A vendor of vegetables in my neighbourhood has a simple, yet effective, method of dynamic pricing. He sizes up the customer by looking at his or her dress, watches closely which car he or she has stepped out of, and then determines what price to charge. You can be sure that if you step out of a Mercedes Benz to buy your daily supplies of greens, this vendor is likely to demand a far higher price. My wife and I now go walking to buy our vegetables.

All these stories are examples of dynamic pricing. This term refers to pricing items at a level determined by a customer’s perceived ability or willingness to pay, or pricing that varies very often to reflect constant changes in supply and demand. This results in highly flexible prices, adjusted real-time in response to a host of variables, including the customer’s previous buying behaviour and current environment.

While vegetable vendors in Indian bazaars have been practising dynamic pricing for decades, the advent of new-age business frameworks such as the sharing economy and e-commerce have resulted in a sharp spike in the number of products and services that are quickly going down this route. This has presented a mixed bag of costs and benefits to consumers. For instance, before Uber, we had stability in cab fares, and knew roughly how much we would pay for a ride to the airport, though we were never sure we would get a taxi when we wanted one. Now, the stability of pricing is gone, but the probability of getting a clean taxi quickly has gone up dramatically.

I have often wondered why consumers readily accept dynamic pricing in some categories, yet not in others. For instance, most consumers know and accept that airlines offer us much cheaper fares if we book well in advance, and the fares then generally keep going up closer to the date of the flight. We are willing to live with this dynamic pricing paradigm. But the same consumers would perhaps be unwilling to accept dynamic increase in prices of Coke cans in higher temperatures, or higher prices for eggs or bread in supermarkets during peak shopping hours.

From the viewpoint of marketers, it is also true that technology has made it far easier to engage in dynamic pricing today. For instance, e-commerce sites can easily analyse a consumer’s past shopping behaviour, understand how price-conscious the consumer is, and then quote to him an appropriate dynamic price for the current purchase. A travel website could even figure out what phone the buyer is accessing the site from, and decide to charge somewhat higher prices to Apple iPhone 6 users who, in their view, are affluent and less price-conscious.

Some fair, some unfair In this new-age environment, it is my hypothesis that consumers will readily accept dynamic pricing wherever they think it is fair, but will revolt where they think it is unfair. However, on the subject of pricing, there is no objective definition of what is fair. “Fairness” is not always viewed through a rational lens. There are often many contextual and emotive factors that come into play.

Here are situations which I think consumers will consider clearly fair or unfair, for dynamic pricing:

• In categories such as airlines and hotels, consumers will generally think that dynamically higher prices closer to the time of consumption is fair. This is because consumers know that capacity of seats or rooms is limited and can go waste if unused, hence they think it is fair that people who commit to a purchase well ahead of time should obtain some reward through a lower price, compared with people who are uncommitted until closer to the date. There is a cost of earlier commitment, for which there should be a just reward.

• In many categories where consumers know that peak hour traffic is higher, and where capacity is also restricted — for example, busy roads or cinema theatres or telephone calls or airline journeys between metro cities — people will think dynamic pricing is fair, because the general perception is that there is greater demand during peak times, and greater demand implies a higher price.

• If consumers perceive the service provider’s effort to be far higher in some circumstances (for instance, a cab driver driving on New Year’s Eve, or a doctor visiting home to attend to a midnight emergency), they will typically feel that dynamic pricing, to appropriately reflect such higher effort, is fair.

• If stores or brands alter prices dynamically in response to a temporary shortage, consumers will generally consider this to be unfair. This will be considered to be an act of greed or profiteering at the expense of the consumer, and will lead to erosion of trust in the brand.

• Any dynamic surge in prices beyond a reasonable limit will also be considered unfair. Research shows consumers find prices that are over three times the normal price of a product psychologically intolerable, even if circumstances justify a higher spike in price.

Let me conclude with a question. Should e-commerce sites in India offer different prices (and discounts) to different buyers, based on analysis of their past purchase behaviour, which would reveal individual consumers’ respective price needs and sensitivities? Would this work better than identical prices and discounts to all buyers on the site at any given point in time? What would consumers consider fair or unfair? Do write in and let me know.

(The author acknowledges valuable inputs from Aishwarya Ramakrishnan in the writing of this article.)

(Harish Bhat is author of “Tata Log: Eight modern stories from a timeless institution”. These are his personal views. He can be reached at bhatharish@hotmail.com )

The author is Member, Group Eexecutive Council, Tata Sons

social-fb COMMENT NOW