While doing some research for a client I came across a research paper titled, "Personalized Dynamic Pricing with Machine Learning," by Dr. Gah-Yi Ban from the London Business School and Dr. N. Bora Keskin of Fuqua School of Business at Duke University.
Admittedly, the paper is full of statistical equations that look like hieroglyphics, so, for the record, let me state that I am in no way attempting to interpret their data or calculations. I am fascinated by some of the findings and conclusions wove into their deep analysis around dynamic pricing. This strategy has been such a hot topic in our industry over the past few years that I felt it might be worth an attempt to make some application. The data reveals that dynamic pricing can work, but for it to be successful a few essential items need to be in place.
You must know your customers
The paper begins by describing some of the approaches involved: "We consider a seller who can dynamically adjust the price of a product at the individual customer level by utilizing information about customers' characteristics."
This need represents one of the biggest challenges for a broad application across travel, tourism, hospitality and attractions. Company A might successfully deploy a strategy around dynamic pricing because they understand their customers. However, company B might quickly assume that it can also pursue the process. We have all seen this copycat syndrome across our industry for decades. However, if company B does not have the same depth of understanding of its customers, the pricing strategy could quickly fail.
The lesson here is that rather than blindly pursuing a dynamic pricing technology, ensure you have the foundations you need. It might be a better investment to research and understand your customers and potential customers holistically rather than prematurely jumping into dynamic tactics.
Fragmentation and segmentation are the enemies
The reality that our business is highly fragmented and diverse is closely related to knowing your core customer. Only some people will respond to dynamic pricing the same way. Some will understand and not even notice. Some will become enraged and feel like they are being taken advantage of. The research would indicate that informing your potential customers is an integral part of personalization.
Subscribe to our newsletter below
When someone can find pricing that only is increasing and none that is decreasing, even for the consumer, it feels like gouging. When consumers can at least find options where pricing is lower than anticipated - even if they cannot take advantage of it - the price sensitivity is lessened.
Airlines are often cited as a successful comparison for other parts of the industry but reflect on how they typically practice this. First, airlines always have pricing segments, business, premium and economy. They also offer cheaper flights if you are willing to endure a long layover or a different connection. It is easier for consumers to understand why a price might be higher. That message, why one ticket is X and another one Y, can be much more complicated to convey. Often some of those that have invested in dynamic pricing as they focus only on obtaining higher profits might see those profits eroded as they spend more on clarifying their policies via marketing, public relations and social media.
Models that thrive on certainty flounder on anomalies
The research indicates that dynamic pricing strategies can be effective when a business has an apparent linear demand for its product. For decades the travel industry has noticed peaks and valleys as to how and when people travel; therefore, it is logical to believe that this demand is linear and will remain such for the foreseeable future. But is that true?
Many in the business have started to note subtle changes in the post-COVID world. More remote work, for example, has shifted how adults and families might approach vacations. The constant press regarding overcrowding at many theme parks has caused many to adjust their plans. Also, let's remember the negative articles that have told the horrible stories of travel consumers who have felt gouged after a day at a popular theme park, prompting many to re-evaluate the value of these excursions. Will all these factors, especially when combined with broader macroeconomic influences, lead to more consistency, which would support the dynamic pricing approach, or to less stability, which might turn it into a liability?
Going viral is not always good
As we watch these different strategies unfold, we also can observe a subculture of communications that are happening. It is amazing how quickly some consumers and potential guests start attempting to understand the algorithms and work the systems that are put in place. Dynamic pricing can quickly become a game of Battleship where third parties – bloggers, travel agents, theme park influencers and countless others – start working to overcome the objectives that facilitated the launch of dynamic pricing to begin with.
Disney has launched one of the most complex systems based on dates and hotel choices and length of stay etc. Its complexity has led to an entire cottage industry springing up where travel agents now charge their customers – also Disney customers – to do this additional planning for them. We cannot imagine that was the intent of this initiative, however, it is a reality. Too often when executives are drooling over the potential returns from an implementation they are shortsighted and do not consider other consumer behaviors that the policy might stimulate.
There is no doubt that date-based or another form of dynamic pricing has a place in our industry, and eventually all of the bugs will get sorted out. Ultimately, the consumer will guide the way, and as always they will let us know what they like, respond to and reject. As with any trend it’s important to count all the costs and determine if the substantial investment required to implement a true dynamic model is right for you.