I recently took a few rides with Lyft in New York City, and I was surprised when the actual prices I was charged were higher than the price I was shown when booking. I finally complained after the last trip to the airport was $30 more than quoted, (I know, I should have switched earlier), and the Lyft rep’s response was, “We use dynamic pricing.” He was wrong. When used properly, dynamic pricing can be a win for the seller and the buyer; but it does not deceive the customers.
I have written multiple blog posts about dynamic pricing, with my main point being it is a very efficient way to balance supply and demand. See Dynamic Pricing Benefits Everyone. Politicians Should Stay Out of It. An obvious but little-discussed example of dynamic pricing is the secondary market for events like sports, concerts, and theater. Scalpers have always adjusted their prices according to the day and time of the game, the importance of the game, and the opponent. The customer is always told the price before deciding to buy and can say no.
In 1983 after moving to Miami, I scalped tickets to multiple Miami Dolphins games. As I recall, the sellers in front of the stadium were able to charge much more for the game against the Jets, simply because there were so many ex-New Yorkers living in Miami. The scalpers explained there were not many seats so they could charge higher prices, and I knowingly paid more to attend. On the other hand, 1 pm games in September against a mediocre opponent from the West had low demand and lower prices. I was young and I could tolerate the heat, so sometimes I took advantage of the lower ticket prices. These days we often use electronic secondary markets like StubHub, but the same principle applies – prices are higher for the most popular events, and lower for the less popular. Buyers can see the prices and decide whether to buy.
Airlines and Hotels are the best-known industries using dynamic pricing. During periods of high demand such as the Wednesday before Thanksgiving, prices are higher. During periods of low demand, such as mid-winter trips to Minnesota, prices tend to be lower. By adjusting prices according to demand, travel companies ensure that the customers who most value traveling on specific days can do that, albeit at a higher price. Those customers who could be more flexible are rewarded with lower prices for doing so.
You might ask, “How is that a win-win? The sellers win because I pay more, but I don’t win.” Well, in fact, you do win. If it is a game you really want to see or a trip you really want to take, you can do so – for a higher price; and you will know the price in advance. Isn’t it better to have the choice to pay more and receive the thing you value than to be told, “Sorry, we are sold out?” Similarly, dynamic pricing results in lower prices for less popular attractions and dates. Those lower prices provide customers with less costly options to see or do what they want – a win.
A more controversial example is hurricane supplies. In Florida, we receive hurricane warnings most years. We all know we should buy water, non-perishable food, and batteries to prepare; but not everyone does it. When a hurricane warning is issued, it is very common to see people buying huge amounts of water, probably more than they will ever need. It is also common to see stores run out of bottled water, resulting in some potential customers having none. If the prices of water increased during these high-demand periods, the hoarders might purchase only what they need, rather than everything they can fit in their car. That would enable everyone to purchase some water.
If you are wondering how these examples relate to my Lyft story, it is they always identify the price upfront. With dynamic pricing, a buyer knows the price in advance of a purchase, and she can decide whether to buy or not. In my situations with Lyft, the prices charged were higher than quoted. After multiple responses that they price dynamically, which I rejected, the company told me that if the origin or destination changes the price is recalculated based on time and distance.
The Lyft and Uber apps use GPS to guess your starting point, and when you begin typing your destination, they use AI to offer pre-selected destinations. For example, when typing JFK, the Lyft app offers JFK International Airport, Terminal 4. I nearly always select the guesstimated starting point and sometimes move to a spot on the street that is not congested and wave to the driver. Similarly, when going to an airport, I select the default terminal. Once the actual terminal is entered, prices are recalculated. What I learned is moving down the street for a pickup or not being exact with the destination can cause the final price to increase by 30% – 50%. I guess Lyft appreciates this because it increases their revenue and profitability, but it sure seems like customer deception to me.
We all want goods and services for lower prices, but more importantly, we want to make buying decisions informed by actual prices. Dynamic pricing adjusts prices based on supply and demand, but prospective customers are told upfront what those prices will be. They can then make informed choices. That process benefits all of us. When companies deceive their customers (intentionally or unintentionally) under the umbrella of dynamic pricing, their short-term profit gains will result in lost customers long-term.
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