The concept of dynamic pricing suggests that sellers can and should adjust the prices they charge according to the demand they encounter. When a snowstorm hits, the price of hot cocoa and shovels should increase. But for small businesses, implementing such tactics has long been challenging. Gauging the market, determining the exact best price level, and then changing all the price tags are time-consuming, complex activities.
Here, as in many other realms, technology is coming to the rescue. With newly available software and apps, small businesses gain access to extensive information about market trends. They also can use well-established algorithms to determine exactly how much they should raise or lower their prices in response to a change in the market.
For example, it is not just demand for cocoa that increases when the weather turns ugly. City dwellers also call more often for the rides offered through the Uber mobile app, which links riders with available cars. The price for the ride (which Uber takes 20 percent of as its fee) varies with demand. So when demand increases drastically, so does the price. When demand is low, the price is too.
A similar method underlies Savored, the restaurant reservation service owned by Groupon. Unlike Groupon’s usual pricing, this service promises diners discounts if they agree to visit the restaurant at traditionally less busy times. Thus for example, a gourmand who agrees to try out the latest hotspot at 6:00 on a Tuesday night might enjoy the same dinner for half the price paid by another consumer who visits at 7:30 p.m. on Saturday.
The pricing tactics adopted by one realty firm are a little more complex, but they still essentially aim to align the cost with the demand for services. Home sellers that list their properties with Duffy Realty pay a set, upfront fee of $500, and then a commission of 1 percent of the sales price (cf. the 3 percent commission, with no upfront fee, charged by most sellers’ realtors). The service provided is relatively sparse. Duffy Realty posts the listing on the Multiple Listing Service and websites such as Zillow; it also hands sellers a booklet with suggestions for staging their homes. But for people who have more extensive experience in the real estate market, such offerings might be sufficient—especially if it means keeping 2 percent of the sales price that they can devote to their next down payment.
Source: Donna Fennjan, “Some Businesses Go Creative on Prices, Using Technology,” The New York Times, January 22, 2014