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There’s nothing new about surge pricing, or “dynamic pricing” as industry proponents call it.
When everyone wants tulips at the same time, tulip sellers raise prices. When consumers have moved on to some other fad flower and you’re left with a glut of tulips, prices go down. Anyone who’s ever hailed an Uber after a Taylor Swift show or booked a flight for the week of Thanksgiving has reasonably expected to pay more than they would off-peak.
But these days, companies are harnessing huge amounts of data to fine-tune their pricing power in places customers might not expect. And people are, understandably, kinda pissed about it.
Earlier this month, US lawmakers raised the alarm over dynamic pricing in grocery stores via electronic shelf labels that allow stores to adjust prices instantly. While that can save employees a bunch of time, it also opens the door for stores to “calibrate price increases to extract maximum profits” at a time when grocery prices are already straining household budgets.
In a letter to Kroger, the largest US grocery chain by revenue, Democratic Senators Elizabeth Warren and Bob Casey argued that widespread adoption of digital price tags “appears poised to enable large grocery stores to squeeze consumers to increase profits.”
It’s not just good old-fashioned price-gouging, either, they allege. Kroger is partnering with Microsoft on a plan to stick cameras on its digital displays, which will used facial recognition tools to “exploit sensitive customer data” and craft personalized offers. (Creepy!)
A Kroger spokesperson pushed back on those claims, arguing that the store’s business model “is to lower prices over time so that more customers shop with us, which leads to more revenue that we then invest in lower prices, higher wages, and an even better shopping experience … Any test of electronic shelf tags is to lower prices more for customers where it matters most. To suggest otherwise is not true.”
So is dynamic pricing just a nicer way of saying price-gouging, or are companies actually trying to get their customers a better deal?
Yes. And also, yes.
Trust us, we’re corporate titans
Look, business is business, and corporations are going to embrace whatever technology they can to make money. But extracting a short-term profit with creepy AI that knows your specific, individual buying history — like the kind Starbucks used recently on my colleague Elisabeth Buchwald — isn’t worth it if they anger their customer base.
Back in 1999, the CEO of Coca-Cola merely floated the idea of a dynamic pricing model and it became a debacle almost as dumb as New Coke.
The idea was, maybe we put thermometers on vending machines that would automatically raise the price for a Coke on a hot day. The anger was instant. People accused Coke of price-gouging, and Pepsi accused its rival of exploiting consumers, according to the New York Times.
Coke immediately walked it back, saying that the company was actually talking about ways thermometer technology could lower the cost of a drink.
Which sounds pretty familiar…
This spring, when Wendy’s announced plans to use AI-powered digital menus with variable pricing based on the time of day, fans immediately accused it of pricing-gouging. No, no, Wendy’s said — we weren’t going to raise prices at peak times, we were going to lower prices at off-peak times.
And there’s the rub. Companies will swear up and down their “dynamic” pricing only goes one way — down.
But, historically, we know better, because we’ve seen how big corporations nickel and dime us to pad their margins when given the chance. We’ve bought plane tickets and paid for checked bags and watched our favorite singer’s ticket price go from $50 to $85 because of some unidentifiable “service” and “handling” fees. Countless girls and women have paid a “pink tax” on skin care and hair care products, and stores regularly tout sales promotions that ultimately benefit their bottom line more than the customer.
That’s why Marco Bertini, a professor of marketing at Esade Business School in Barcelona, says the problem is not the tools used for dynamic pricing but the monopolistic status of the companies potentially abusing them. (The US Justice Department’s looking at you, Ticketmaster…)
There are good ways to use dynamic pricing that benefit buyers and sellers, Bertini notes. For example, a store can create instant, automatic discounts on milk or yogurt so that the price goes down the closer it gets to its expiration date, helping avoid the kind of food waste that’s both expensive for businesses and bad for the environment.
It all comes down to the companies’ intentions, Bertini says.
“Any government should be worrying about the market power of companies and why they have it, not so much what they do with that market power.”
Price abstraction
On a deeper level, though, these variable pricing models serve as a blunt tool to give more power to companies. As Bloomberg columnist Amanda Mull recently noted, they provide a “convenient source of abstraction.”
“The history of modern consumerism is built on the concept of the public price … If no two buyers see the same price at the same time, the consensus reality that underpins the system — or, at least, underpins the only theoretical power that individuals can have within it — becomes totally moot.”
In other words: The more retailers obscure the base price of everyday items, the less power we wield to vote with our wallets.
