Dynamic pricing is a marketing masterstroke – if you can sell it

The Slug and Lettuce on Chicheley Street is the local boozer for many of the Marketing Week staff. It’s been the dimly lit location for many an emotional discussion about marketing. It’s also the best place to connect with Marketing Week’s editor/supremo Russell Parsons. He might be impossible to catch at Cannes or any of the major marketing events he attends, but there you can enjoy unfettered access every Friday night.

But there’s likely to be trouble down there this Friday. The pub’s owners, Stonegate, have recently committed to “dynamic pricing” across 800 of the pubs that it operates in the UK. From now on a “Polite notice” appears on all the pub’s tables announcing: “Dynamic pricing is currently live in this venue during this peak trading session.” Suddenly your pint of Stella is 20p more expensive than it was on Tuesday.

Here’s the full text:

Step back from some of the sensational headlines that greeted the move last week and it’s hardly a brand-shredding move. A British pint already usually costs more than four quid so the 20p extra is hardly a massive hike. And the decision does make some fiscal sense. While pubs take more money on busy nights, their operating costs also skyrocket, with more bar staff, cleaners and bouncers required.

But costs aside, why shouldn’t a company be able to maximise profitability when demand grows? Nobody feels bad when companies reduce their prices when they cannot sell products. So, what’s the big issue with the alternative situation? Markets are meant to be efficient and when consumers want more of something, especially something that comes in limited amounts, every producer is entitled to charge more. Nothing breaks a proper marketer’s heart more than a ‘Sold Out’. Yes, it means you had a lot of demand. Yes, your sales director gets a bonus. But you almost certainly followed volume over value and lost money as a result.

With a bit of data, smarts and the capability for price discrimination, you could have made more profit from a higher price that probably would have had very little impact on demand. And even if your higher price did soften demand a little, you are probably still better off with a few empty seats and better gross margin.

Pricing: Marketers on the business case for behavioural science

Flexible pricing

There are plenty of companies now enjoying the kind of pricing flexibility that allows them to make more profit when demand increases, alongside the failsafe of lower prices should that demand not materialise. And the delta between the top and bottom of these companies’ price points is a lot more than 20p. On a Ryanair plane, for example, two travelers can regularly sit next to each other ignorant of the fact that one paid 10 times what the other was charged. Buy at the right time, on the right day, ahead (but not too far ahead) of your departure date and you save money.

Or do you? Maybe you are simply getting the base, advertised price and your fellow traveller is the one losing out? Pricing has always been more about perception than cost. And that same rubric applies to the introduction of smart pricing. It’s not the amount of price difference that matters, it’s the way the change from one level to another is framed to the consumer. Everything hinges on how consumers perceive the different prices, how aware they are of the variance and how comfortable the market has become with the whole idea.

The way you present a price is significantly more important than the price itself.

So far, the beer industry appears to be operating with a pint-half-empty mentality. The various drinkers quoted in interviews last week were staunchly against the move. “We know pubs and brewers are having a difficult time at the moment,” Tom Stainer, the CEO of the Campaign for Real Ale, told the FT last week, “but we don’t think an extra charge penalising customers that want to support the industry is the right solution.”

Seeing the move as “penalising” or calling it, as many did last week, “surge pricing” certainly does not help things. Stonegate had been careful to introduce the move as “dynamic pricing” in an attempt to position this as a dashing, efficient and very 21st-century approach to selling ale. Almost as if drinking eight pints of dynamically priced beer would enable you to walk home without the aid of lampposts or kebabs and then enable you to get up and run a half-marathon while checking your inbox the next day.

The obvious mistake in all of this was maintaining a flat price and then putting it up when demand grew. I am not sure of the legalities involved, but putting every price up by 20p and then bringing them down when demand is lower is surely the smarter move. It’s always generally easier to drop prices than to put them up, and if there is one thing I have learned about pricing on my travels it’s that the way you present a price is significantly more important than the price itself.

Les Binet: Long-term brand building plus creative advertising is the key to firmer pricing

Only marketers get this point, but even they mostly miss it. While the rest of the organisation is busy setting loopy prices based on costs and what their competitors are mistakenly charging, good marketers should be able to point to pricing research to show what the price should be, and to the dark arts of behavioural economics for how to set it there without a whimper from the market.

Call it whatever you want – smart, dynamic, surge – but changing price on a regular basis is possibly the most abject example of how marketers and markets see things differently. In theory, as costs and demand change, companies should be able to alter their prices almost in real time. But in most categories consumers assume the worst and jump to a whole host of suspicious conclusions the minute the price point changes.

The only hope for Stonegate or any other brewer hoping to migrate to dynamic pricing comes from across the many interviews with drinkers in the media last week. Each followed a similar, very British pattern. Queried whether the 20p occasional price hike was a bad thing, most punters were outraged to the point of violence. But with a sad little shrug, most then confessed that after 9pm on a Friday they had absolutely no fucking clue what they were paying – for anything.

Maybe the trick with smart pricing is only switching it on when the consumer is at their very dumbest and switching back off before they sober up again.