Be Money Smart: Avoid ‘Surge Pricing’ Tricks

Dynamic pricing is a business strategy that uses adjustable prices (which can swing quickly and often) instead of fixed costs on products and services.

Dynamic pricing is also sometimes called “surge pricing” because of how prices tend to suddenly surge if demand suddenly increases. Surge pricing is common with transportation apps, delivery apps, and some marketplaces.

You may also hear the term “variable pricing,” which has less of a negative connotation. This reflects a strategy that actively changes the pricing of a product based on the current market demand. Gas prices are said to have “variable pricing.”

So, what does that have to do with you? If you have ever shopped online or tried to book a flight using your smartphones, chances are you’ve experienced dynamic pricing. Let’s take a closer look at dynamic, variable, and surge pricing and how you can regain the upper hand.

What is Dynamic Pricing?

Dynamic pricing, also referred to as location-based, surge-, demand-, and time-pricing, is a technique companies use to change the price of something based on different factors. What are those factors? Competition, supply and demand (basically how popular something is), consumers’ willingness to pay (perceived value of an item), customer demographics and data can all affect how much you pay at the register. In essence, the core concept of dynamic pricing is to sell an item/service at different prices to different people.

A perfect example of dynamic pricing that happened during the 2020 COVID pandemic are toilet paper and hand sanitizer — everyday items began to fluctuate drastically because of panic buying.

Here are some of the ways companies use dynamic pricing for online shopping:

Adjust prices to match or beat competitors: Amazon and Walmart are good at this. They often have identical prices on popular items or underprice each other by a penny or two.
Adjust prices based on the day or time of day: Online shopping peaks during weekends and evenings when prices rise.
Adjust prices based on web traffic for online stores: The more online shoppers view an item, the more people show interest in a product, the greater chance the price will increase.

What is Surge Pricing?

Surge pricing is another term that’s interchangeable with dynamic pricing. However, surge pricing will more specifically refer to pricing models that look to increase prices when more customers are shopping to match the demand. Surge pricing models may automatically increase the price of something when the model senses a high volume of transactions within a short period.

The transportation company Uber was the first mainstream company to adopt surge pricing. Uber’s surge pricing model:

Algorithm controlled (automated)
Adjusted based on the number of drives in a given area
Designed to “balance” a market that has a high demand of riders and low number of drivers
Actively updated

As you can see, this is very similar to the dynamic pricing we outlined above. The main difference is that Uber’s surge pricing model is based on the relationship between available drivers and the demand of customers. Not, necessarily, the total volume of customers. If the demand is being met, the price may not surge.

Other companies have since adopted surge pricing models, sometimes calling them “dynamic pricing” or “variable pricing” as “surge pricing” is an infamous term.

5 Types of Dynamic Pricing

Time-based variable pricing
This variable pricing model will change the price of something depending on a certain time frame. This could be a time of day, a time of the week, or even a time of the year. An example would be some electricity service plans that increase the price of kilowatts depending on the time of day.
Location dependent pricing
Some variable pricing models depend on the location where the product is being purchased and adjust it dynamically. For example, rural communities may experience lower prices when shopping at a grocery store or fast food restaurant, as demand isn’t as high in a low-population area.
Customer dependent pricing
A dynamic pricing model may adjust the price of an item depending on a customer’s individual profile. For example, if that customer historically tends to purchase products in a certain category, a personalized coupon could be issued to them. This personalized discount makes it more likely for the customer to make a purchase. An example would be a digital marketplace sending out a promotional email that lists a specific discount on a product that the receiver is interested in.
Demand-based pricing
This dynamic pricing model is commonly associated with surge pricing, as the price of a product or service is dynamically increased to match this demand. This model requires a system to be set up that detects the volume of sales, or interested sellers, within a certain time. It then increases the price to match this demand. An example would be a restaurant changing the price of its food if it receives a sudden increase in incoming orders.
Market pricing
If the market shifts due to an external effect, it can be possible for a company to dynamically change its price to match the greater climate of the supply chain. For example, during the pandemic, there were significant, sudden changes to the market as a result of social distancing. Industries needed to dynamically change their pricing depending on new customer behaviors.

What Companies Use Dynamic Pricing Most Often?

While dynamic pricing doesn’t work for every item like apparel basics, including underwear and T-shirts, it is very effective for others. It makes companies a ton of money from unwitting customers. Industries most notable for dynamic pricing include:

Travel (Airbnb, airline industry)
Hospitality
E-commerce (Amazon)
Utilities (electricity, water)
Retail
Entertainment (sports and event ticketing)
Transportation (Uber, Lyft)

Is it fair? Debating the fairness of dynamic pricing is a muddy area. From a business standpoint, dynamic pricing is a valuable tool for increasing profits and growth without much effort besides messing around with algorithms used to generate pricing. From a consumer’s perspective, the answer most likely would be no, dynamic pricing isn’t fair; it’s discriminatory. However, if you’re a consumer paying the lower prices, you may think dynamic pricing is the greatest thing since sliced bread.

Advantages and Disadvantages of Dynamic Pricing

Unfortunately, the benefits of dynamic pricing tend to favor businesses. Dynamic pricing can help companies boost sales, maximize profitability, stay on top of their competitors, and efficiently manage their inventories. Dynamic pricing, to a certain extent, is necessary to adapt to a rapidly changing market. Surge pricing will specifically allow a company to actively adjust their prices to match sudden shifts in supply and demand.

Disadvantages tend to “favor” consumers: You pay more. But, it’s not all roses for companies that use dynamic pricing. Dynamic pricing increases competition, leads to price wars and lost sales, and can reduce customer loyalty and alienate some shoppers.

Ticketmaster Oasis Dynamic Pricing

As a recent example of how dynamic pricing can be harmful to the consumer, the official ticket seller Ticketmaster had prices quadruple for the band Oasis’ reunion tour. Ticketmaster used a dynamic pricing model that would increase the price of tickets depending on the demand for tickets.

Ticketmaster wasn’t transparent about these practices, and customers were surprised to see how expensive tickets would be. However, they were under a lot of pressure to buy tickets before they were sold out, and many still purchased the heavily overpriced tickets. This resulted in a regulator probing Ticketmaster to see if it had breached consumer protection law.

Savvy shoppers can outsmart dynamic pricing. Read on to learn how.

How Can You Beat Dynamic Pricing?

If you have seen a price change while shopping online, you may have witnessed a type of automated dynamic pricing that happens when sellers use technology to “gauge” buyers’ interests and try to adjust the pricing accordingly.

Here are a few tips to try to beat online dynamic pricing in retail and travel:

Delete your cookies: Clearing your browsing history can eliminate retailers from tracking your online movements. Not sure what cookies are? Learn more about cookies and what happens if you don’t accept them.
Use a store’s price match/price adjustment policy: Retailers like Target, Walmart, and Kohl’s have price matching or price adjustment policies. If you find a lower price in-store or online (including their own websites) within a specified time frame, they’ll adjust the price during checkout or reimburse you the difference.
Set price alerts: CamelCamelCamel.com and InvisibleHand track items’ prices for you and send you a notification via email when the price drops. CamelCamelCamel is a website that will only watch prices on Amazon. InvisibleHand, now called CNET Shopping, is a Chrome browser extension that monitors prices across retailers, including Lowes, Best Buy, and Sears, and airlines, including Southwest, American Airlines, and United. All you have to do is select the item(s) you want to be tracked and the price at which you wish to receive a notification.
Abandon your cart: Try putting an item in your online shopping cart and walking away. Retailers, including Macy’s, Bed Bath & Beyond, and Williams-Sonoma, are known to offer coupons to shoppers who abandon their carts.
Shop online without being seen: OneLaunch’s incognito mode allows you to browse anonymously by preventing sites that you visit to set cookies to track you.

It’s safe to say dynamic pricing is here to stay. So, while these tips won’t guarantee a win against dynamic pricing every time, they can help reduce the chance of you getting stuck paying a higher price than the next shopper.