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Why dynamic pricing is a trap you must avoid

September 20, 2011 by Dale Furtwengler — President, Furtwengler & Associates, P.C.

Last week we discussed the airline industry's use of dynamic pricing and its impact on us, as consumers. Two other well known organizations, Ticketmaster and the St. Louis Cardinals baseball team, have gone to dynamic pricing to stem declining sales. Will this be an effective strategy for them or yet another form of denial?

The Goal

Both organizations are hoping that by adjusting prices based on demand that they'll put more butts in seats and increase their revenues. Makes sense, doesn't it? Or does it? Let's think through the process a little more.

The Reality

Let's assume that you're a buyer for concert or Cardinal baseball tickets. You're going to fall into one of two categories - either you're an avid fan or you're looking for something different to do, a break from the routine of daily living.

Avid fan

If you're an avid fan, are you going to wait around to see what the best price is or are you going to buy your ticket early to assure yourself a seat? Concert goers who are avid fans are looking for front-row seats. They're going to buy as soon as the concert is announced to reserve those seats.

The same is true if you're an enthusiastic Cardinal fan. You're going to buy season tickets to assure yourself of the games and seating you desire. You're not going to wait to see what the price is. So who, exactly, is the dynamic pricing targeting?

Buyers who are not avid fans. How will dynamic pricing effect their buying habits?

Occasional buyers

This is a different story, isn't it? If you're only going to an occasional concert or ball game, price is more important to you. How important? That depends on how much you value your time. If you place a great deal of value on your time you'll choose a concert or ball game that interests you and buy the tickets. You're not going spend a lot of time looking for the best price.

Conversely, if you don't place much value on your time, you'll monitor the fluctuating prices looking for the best price. But will that change your buying habits?

Let's say that you attend one concert or ball game a month. You make your choices primarily on price, secondarily on the artist or competing baseball team. After all, you're just wanting a break in your routine. Are you going to go any more frequently because the pricing lower? Not likely.

Are you going to spend any more at the concession stands because the ticket price is lower. Probably not, there's a limit to how much food and drink we can consume in a given time frame. So what really happened here?

The Result

If you're an avid fan, nothing. There was no change in your buying habits whatsoever. If you're an occasional buyer who values your time, you may have gotten lucky and gotten tickets at a lower price without having to do anything other than providing payment. Other than that nothing has changed.

With occasional buyers it's a different story. You've expended time, energy and effort to get a lower ticket price. Sometimes you win that lottery and sometimes you feel cheated because you bought at a higher price than you could have gotten those tickets. Your ancillary purchases of food and drink at the event don't change.

What does that mean for Ticketmaster and the Cardinals? It means that they've merely shifted their occasional customers from their normal ticket pricing to lower prices without any attendant increase in revenues. Remember, those who aren't interested in that artist or Cardinals baseball aren't going to attend at any price.

The net result is that Ticketmaster and the Cardinals are going to experience a further decline in sales and profits when their goal was exactly the opposite.

What Should You Do

Don't fall into this trap with your business. Find the root cause of the sales decline and fix it. Often the solution is as simple as revamping your marketing to reinforce all the reasons why these buyers make their choices.

With Ticketmaster that might mean tracking buyer behavior and using that data to target those buyers with messages like, "As a blues fan you're not going to want to miss this ... Tickets are limited, make your reservation NOW!"

The Cardinals could tout their long winning history, team rivalries or the opposing teams VIP class player vs. the Cardinal player.

The key to stemming declining sales is better marketing, not dynamic pricing.

About Dale Furtwengler

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