Dynamic Pricing - Data Driven Price Gouging

Your "I'm going to delete my browser history" reason for the week

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The North American buying experience is, crazy inflation aside, not the worst thing ever. It's easy to look at rising costs across the continent and throughout every industry before coming to the conclusion that purchasing things sucks and we should all just revert to bartering like in the good old days, but there are some things that we take for granted that are not shared in other parts of the world. To list these things sounds silly because they're so common in Canada and the USA, but when you go to the store, you probably expect that...

Shelves will be stocked with products to buy

People won't attempt to loot your cart while threatening you

The price on the shelf is the price you'll be charged for that item

Most people will agree that these are below the bare minimum for shopping standards, but again... this is distinctly a North American luxury. Many places in the world experience frequent supply shortages given ongoing conflict and lasting supply chain effects from the pandemic response (or while during the response). Many areas of the world are unstable and cannot guarantee safety in most places, including stores and shops. And then there's the places where hyperinflation means the price on the shelf is likely irrelevant after a couple days.

Looking at that small list, I don't think that anyone would be too excited to see any of those situation (unless it was the last point and the price was a surprise discount). We live in an era of online access, and companies have built business models based on availability, convenience, security, and affordability. With that online access comes data. Lots and lots of data. That data holds lots and lots of information, and businesses have and will continue to invest buckets of money in analyzing that data to spin it into figurative gold.

I've mentioned before that companies only exist to make money, so of course that's going to be the biggest use of the data they collect. It's one thing to let data dictate how to price your products or services, but what about letting data completely control pricing on an individual basis. As in... you get one price and you get another. Sounds kind of creepy doesn't it? It's the Dynamic Pricing Model, and not only is it creepy, but it has the potential to become very popular in the future.

So what exactly is the Dynamic Pricing Model? How does it work? What advantages does it offer businesses and consumers? And why should we be extremely wary of this system of pricing?

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No sale for you

As I mentioned above, the Dynamic Pricing Model is a method of pricing your stuff by letting the computer and all your data take center stage. Just based on that statement alone, think of the data you generate in a given day. What websites do you visit? What posts do you click on? Did you spend 10 minutes on TikTok or an hour on Youtube? What did you watch and for how long? The amount of data that comes with even a day of internet activity is staggering. Not only that, but it's highly individualized. The data that you generate is different than your friend, your child, your coworker, or that guy at the Starbucks. Given all this information, the Dynamic Pricing Model takes in everything and spits out a price that is tailor made for you.

And when I say it's a price just for you, that's exactly what it is. Only you will be purchasing that item at that price. Or maybe the system is designed to have only a set number of price options. The data that determines the price could be different between industries and systems. Certain companies could prioritize certain types of data depending on their target market.

At the end of the day, the aim of Dynamic Pricing is to deliver the best price to the customer in the eyes of the company. Let's be honest, the price a company wants to sell something at and the price a customer wants to buy that something at are often very different. The company is in the driver seat in this scenario though, and they will use the system to price gouge you just enough that you'll still be tempted to buy in.

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I'm not going to get willfully price gouged

I appreciate that you feel that way, but the optimism quickly fades once you realize that...

a) Tech is very powerful these days

b) Companies have this down to a science

c) The brains behind this model are very big

Before I dive into why resisting the Dynamic Pricing Model is so difficult, it's important to know how companies currently use your data. There are two main ways data is collected and used...

Market Analysis

The less personal of the two, market analysis is a general scan of broad trends that steer pricing of goods and services. Sounds super technical, but really it means that companies look at their sales (and the sales of competitors) to see what's popular (and what will be popular in future) and price things according to what the masses have shown will be successful. With some of the high tech analytics tools out there today, this can be done to insane degrees and it remains effective even though it's not very personal. What is personal is...

Web Tracking

Have you ever visited a website with one of those small side bar type ads on it? Of course you have! Most of the time, they display a banner that may be seemingly random or kind of on brand with the website it's displayed on. Every so often though, you get that creepy feeling that your device has been listening through these banners. You talked about getting pizza and all of a sudden every banner is advertising... well... pizza. What's going on here is that the banner's are using the data you generated to deliver ads it thinks you'll be interested in. Sometimes it does a good job to the point of being a little unnerving. Web tracking is what's allowing this to happen and it is that highly personal data collection that our Dynamic Pricing would use. Every click, every scroll, every play of a video... it's all data and it's all logged.

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Ok fine, but I'm still not getting price gouged

For the ease of it all, let's stick with the pizza thing from earlier.

Take these two data collection methods and combine them together. You have the market analysis to help you set a baseline price, but that web tracking is the key here. If you had access to all the data generated by that customer, you could see that they...

Frequently use Google to look at pizza store hours

Use their phone when it's signed into a pizza store's free Wifi

Engage with more social media around dinner time

The list continues, and yes, the data and the access is all there. So what's my point? Put simply, do you think if I offered to sell this person a pizza versus someone who doesn't prefer pizza, who do you think is more likely to buy it?

But everyone has a price. I may be able to sell that pizza to the pizza lover for usual price, but it's likely I'll have to lower the price to get the purchase from the non-lover. On the other end of the spectrum, I bet the pizza lover would be willing to pay more for that thing they love so much. Yes, the model has certain limitations; I can't just stand at the entrance to the shop and direct people to the "expensive line" because people may look at me like I lost my mind. However...

So much business is done online these days!!

It's all on the internet, and that means that the algorithm can price you directly from the source of the data it uses (the device you're ordering from!). And really, are you ordering off two different devices for a single meal to know you're getting a different price than normal? How do you know that's not a price the algorithm marked up by 10% because it's a holiday Friday and you have people over? That's how Dynamic Pricing price gouges you... it delivers you a price that is just acceptable enough that you commit to it, but you don't know just how bad the price really is.

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The price is right

By now you can probably see that this system is skewed to be in the best interests of companies. The obvious benefit for them is that they can make more money, but this is done by...

Maximizing return on people who are easy to sell to

Getting any return on people who are hard to sell to

It means that companies get to double dip on how many people they can sell to. On top of it all, people won't notice unless they go looking. With the pricing being data driven, companies will also find themselves doing less leg work to actually find a price to sell something at. Why do it yourself when machine learning can do it in a fraction of the time and more accurately? Implementing Dynamic Pricing really doesn't have many downsides for businesses as long as they are prepared for the potential public blowback if they get caught using it.

How about you? Do you get any benefits from this system? Even with the deck stacked against you, there is ONE benefit that we can find here...

Dynamic Pricing is not widespread and isn't perfected yet

If ever you find Dynamic Pricing is being used and if you can figure out what metrics it uses, you can game the system to spit out the lower price. All you need to do is convince the algorithm you're a hard sell. This is even more powerful in a group setting; Just find who gets the lowest price and buy everything with their reduced price. Being crafty can see you dodging the price gouging and giving a little "love" back. These sorts of exploits will be remedied as the systems get better and smarter, but for now we'll take what we can get.

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Domino Effect

Pricing aside, we need to be watchful of the Dynamic Pricing system. It's an easy sell for me to say "The thing that makes you pay more money is bad" but what are the knock on effects of this system? There's a couple big ones...

Minimum Viable Products

I've covered this before and how it weaves in with selling products and services at a Shell Price, but Minimum Viable Products are perfect fits for a Dynamic Pricing model. If you sell the bare minimum and offer an array of premium markup options, you could use Dynamic Pricing to deliver certain items at an increased price based on previous interest. It could also be used to convince someone to buy something they don't need because it's so darn cheap. It sounds like normal sales stuff but remember... it's an algorithm running things and it is not interested in doing you any favors. The idea of Minimum Viable Products is already bad natured as it is, so it's functionally a double whammy of anti-consumer practices.

Supply and Demand

The supply chain is already in rough sorts right now and the last thing we need is to go digging around and making it worse. The Dynamic Pricing model is designed to sell you products and services, and is designed to do it based on your individual data. It does not consider the global market outside of very broad strokes. As a result of it's programming and functions, it could see supply and the resulting demand for items be wildly thrown off. Things like chip shortages are already happening, so what happens if an algorithm that doesn't know or care about this sort of thing cranks the dial to eleven?

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Resistance is not futile

Dynamic Pricing is not a good thing. It's anti-consumer and it's designed to price gouge you with as little effort as possible. Here's the thing... we can prevent this from happening. Keep an eye out for it now that you know what to look for. If you see it being used, call it out and make it widely known it's there. Make as big a stink about it as you can. Word of mouth can and will make a difference in the social media sphere. Make the best business decision possible be not implementing this pricing system.

As this is an algorithm driven system, you will best be able to avoid it by shopping local and in person. That being said, tons of business across multiple industries continues to move online. This is where the data comes from and it's where you'll see this used the most. As they taught us when we were all still internet rookies, be careful out there. And if it seems to good to be true, it probably is.

~IR

Have you seen Dynamic Pricing used yet? Would you consider taking your business elsewhere if you found a place that implemented Dynamic Pricing? Or maybe you just have a comment to add? Check out the Facebook, Twitter, Instagram, or LinkedIn page and let everyone know. Don't forget to follow or like the page for updates! And share this article if you feel others should give it a read!

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