10.6 Dynamic vs. Static Pricing
Dynamic pricing can be defined as “adjusting prices continually to meet the characteristics and needs of individual customers and situations.”4
Uber’s dynamic pricing is perhaps one of the best-known modern examples. With its vast data collection and analysis capability, Uber can spot supply-demand imbalances between drivers and riders in real-time. If there are too few drivers relative to the number of people seeking rides, Uber can declare a “surge” in which prices are multiplied by some particular factor. The price multiplier is set to adjust upwards or downwards automatically based on the size of the gulf between the available demand and supply.
Using such a system leaves Uber open to allegations of price gouging. During and just after natural disasters, and sometimes other events such as holidays, weather conditions, and special events, surges tend to occur, leaving customers feeling as if they are being exploited in a vulnerable moment.
However, market forces counteract this risk: Higher prices during a surge incent more drivers to get onto the roads to offer their services, and simultaneously dampen demand among would-be riders. As the number of people seeking rides drops, and the number of people offering rides increases, prices can dynamically come back into alignment. Without surge pricing in place, the imbalance between supply and demand would take far longer to correct.
Dynamic pricing is not the same thing as holding a sale or promotion. A promotion involves a planned, short-term price discount designed to attract new customers or to upsell existing ones into additional products or services.
The opposite of dynamic pricing is static pricing. With static pricing, the price of a particular good or service is set by the seller at some fixed number. Of course, the seller can alter this price, but under such a system, changes are infrequent. Static pricing is far more common than dynamic pricing.
4 Kotler, Philip & Gary Armstrong. Principles of Marketing. Pearson Education: 2016.