Controversial ridesharing company Uber has become infamous for its surge pricing — a term it is trying to patent.
Surge pricing is the practice of aggressively increasing rates based on short-term spikes in demand. But dynamic pricing has been around for decades, especially in the airline and hotel industry.
Lodging start-up Airbnb is implementing a new model designed to help hosts price their offerings based upon demand for certain dates, location, local pricing, availability and more. Hotels, meet your match.
And multibillion-dollar start-ups are far from alone in testing the limits of pricing power — powered by technology. Consumer giants like Amazon use algorithms to tweak pricing — sometimes to the buyer's advantage — as sellers compete over your business. Dynamic pricing is showing up in more of the purchases that make our daily lives easier and more fulfilling. The more you know, the better a consumer you will become in this brave new world of pricing algorithms.
Here are some examples.
—By Michael Sheetz, special to CNBC.com
Posted 20 November 2015
Walt Disney is considering a plan to increase prices for admission to its theme parks on busy days and lower them on slow days. The goal is to attract more people in the off season and on weekdays so that the park isn't slammed at busy times, such as summer weekends and holidays. At Disneyland in California, single-day tickets currently cost $99, while Walt Disney World in Florida charges $105, both regardless of when people visit.
Disney said that it's surveying visitors to gauge interest in the new pricing model. Disney has also made price changes to its annual passes, including a new Disney Signature Plus option for $1,049, which allows for access to all Disney parks with no black-out date.
The idea is nothing new for Disney properties. The best-selling musical on Broadway, Disney's "The Lion King" has continued to set box-office records in New York City by using a pricing algorithm that adjusts the cost of seats based on demand.
In this wired world — and with more people fighting over claims to cyberspace — dynamic pricing exists as a capacity regulator. Around 50 percent of in-flight Internet company Gogo's Wi-Fi services — available on more than 2,000 commercial aircraft — cost $8 per session. The average price is around $13, due to transcontinental flights. But on heavy business-traveler flights, such as from New York to San Francisco or Los Angeles, the same service can cost as much as $39 for a session on a Monday or Thursday.
"We know that the number of people using the service varies greatly depending on the city pairs. The longer flights get a huge amount of people using the Wi-Fi," said Steve Nolan, Gogo spokesperson. "This pricing allows the ones who want to use the Internet on those flights the possibility. On most transcontinental routes, we change the pricing down to the day."
Skiing is a recreation for both the affluent and the aspirational, so it's no surprise that dynamic pricing has made its way to the slopes. In some cases, that's leading resorts to not only make more snow but also more money.
Around 20 percent of resorts in North America use Liftopia's Cloudstore pricing engine, which starts pricing daily tickets at a discount months in advance — typically, 30 to 35 percent lower than the price at the window. As the date gets closer, the discount shrinks until the cost is near or equal to the window rate, depending significantly upon the factors of how many tickets are available and what the weather will be for that day.
According to Liftopia CEO Evan Reece, as many as 75 percent of bookings are completed online in advance, compared to none a decade ago. Additionally, the adult single day price at the window has gone up this year by 9 percent. It's a good example of how technology can assist the wise consumer.
"While window rates are in fact going up, the cost of skiing is not. The cost of entry into the sport is coming down to those who are willing to commit in advance," said Reece.
Golfers book tee times through three different methods: walk-ups, calling the course's pro shop ahead of time and reserving online. Many courses around the U.S. are implementing surge pricing for their tee times to increase online bookings and fill more tee times.
Similar to ski resort lift tickets, tee times become cheaper to book online due to factors such as off days or if there might be poor weather. Course rates that used to change only once or twice a year can now fluctuate appropriately to demand, providing golfers with the opportunity to be bargain-hunters.
OpenTable began testing a last-minute prime-time dinner reservations program in New York City last month called Premium Reservations. According to its research, there is both the demand for last-minute reservations at popular restaurants and the desire to pay steep fees to get them. The price for a Premium Reservation can run as a high as $200 when booking a same-day slot.
According to OpenTable, all of the proceeds from the extra cost will go directly to the restaurants.
Transportation departments in Washington, D.C., and Boston this year are considering going to a self-adjusting pricing model for their parking meters. The D.C. Department of Transportation is piloting "ParkDC," which will test hourly rates in 1,300 spaces. Boston, as a part of their "Go Boston 2030" initiative, plans to add more than 8,000 electronic meters. Officials have hinted that these could have dynamic pricing rates.
San Francisco successfully piloted its program "SFpark," which used dynamic pricing to adjust on-street meter rates. A June 2014 evaluation reported that rates dropped an average $0.11 per hour, target occupancy for spaces (60 to 80 percent) increased 31 percent, blocks were full 16 percent less of the time, and citations for parking meters declined by nearly a quarter.
So for all the furor over surge pricing, it's hard to argue with technology that results in less parking tickets.
Once upon a time, on "any given Sunday," any given ticket for an NFL game was the same price. That's not the case anymore. Some teams attempt to charge season ticket owners "seat licenses," and half of the NFL's teams now use dynamic pricing for their tickets.
Prices for tickets to games adjust based upon a team's opponent and how well the tickets are selling. A game against a highly anticipated division rival and a game against a lackluster team can diverge greatly in cost.
2015 has proved to be a "genie-out-of-the-bottle" year for dynamic pricing in video games. And the gaming industry is a good test case, since its "products" don't actually exist.
Monetizing "freemium" games has become an industry standard. That's how Zynga and King Digital Media went public. But costs are very different for gaming compared to most industries, as pricing is done with an endless supply at zero marginal cost.
"Once you have created the code, the magic source of the game, it doesn't matter if you sell one unit or 1 billion units; it all comes at virtually no extra cost," said Niklas Herriger, CEO of Gondola, a game analytics service with an active registry of more than 100 million players. "The trouble [for us] is that part of the justification for surge pricing is the scarcity of goods," Herriger said. "Yet for the majority of the user base, we are able to actually reduce prices."
Gondola helps video game companies use analytics to dynamically price their games, so that novices can be encouraged to play (i.e. spend) more, and heavy users can be milked for more revenue. Or as Gondola says on its marketing website: "Monetize whales properly with higher prices while maintaining low-entry prices for casual players."
These services are able to instantly adjust both the price of virtual currency and of virtual items. Virtual currency, however, is not adjusted on the dollar side but rather on the amount of currency "rewarded" at a certain dollar amount. Changing the quantity of virtual currency — and not the dollar amount — makes the small subset of paying "freemium" users much less price-sensitive.
Hypothetically, a player who buys a $9.99 pack of 2,500 gems several times could see that $9.99 pack give them 2,250 gems the next time they buy it, because of the demand. But someone who's never paid may see the "reward" for the $9.99 pack is 2,900 gems.