Elucidate Effects of Dynamic Pricing

If your customer believes they’re being asked to pay a higher price for a service than are similar customers, they’re more likely to generate negative word-of-mouth (WOM) about you. The contribution of studies at University of Fribourg which validate this expected effect is in elucidating the different reasons it happens.
     A common reason for different customers paying different amounts is dynamic pricing, where the marketer moves the price for an item up and down frequently in response to a complex mix of factors such as the popularity of the item, what competitors are charging, and customer characteristics. Dynamic pricing can lead to both price confusion and perceptions of unfairness among shoppers and customers.
     It is these two responses which stimulate the negative WOM, say the researchers: Price confusion is the predominant motivator for generating negative WOM when the services are of a type the customer frequently purchases. The consumer may be seeking clarification and advice. Perceptions of unfairness are the predominant motivator for services of a type infrequently purchased. The consumer may be seeking revenge and social support.
     The researchers say the major managerial insight from their findings is to avoid using dynamic pricing when there’s a high likelihood your business reputation would be damaged by negative WOM. But when done properly, dynamic pricing increases a marketer’s profitability directly, by charging close to the maximum shoppers are willing to pay, and indirectly, by coming closer to optimizing the supply/demand balance. That indirect benefit can be especially important with services, such as a concert ticket or airline booking, because the supplies of capacity and time are limited. If you choose to employ dynamic pricing, mobilize ways to reduce the negative WOM.
     University of Passau studies conclude that presenting an ecommerce dynamic price in terms of a discount of at least 10% from a reference price reduces irritation. Transparency about the marketer’s use of dynamic pricing also proved to be important. In the studies, when the procedures involved the consumer participants discovering the policies and procedures of variation in prices on their own, this aggravated negative reactions.
     HHL Leipzig Graduate School of Management researchers find that persuading shoppers to authorize your collection of information about them increases dynamic pricing acceptance. It works because, after agreeing to have you learn about their browsing habits, shoppers attribute more responsibility for a price increase to some characteristic of themselves rather than to exploitive intent.

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