Here’s a riddle for you: What all-American seats go up and down and all around, bringing strangers peanuts and proximity in nearly all weather?
The answer: Tickets for an American Airlines flight and a Major League Baseball game. You see, the airline industry and professional sports – American and MLB, in particular – have been innovative with their use of “dynamic pricing” in recent years, offering blueprints for other consumer-facing businesses to embrace the role of auction-based technology and big data in the modern buying-and-selling process.
Dynamic Pricing Primer
What, exactly, is dynamic pricing? We’ll allow Alok Gupta, the Curtis L. Carlson Schoolwide Chair in Information Management at the University of Minnesota’s Carlson School of Management, to field that one.
“The basic principle of dynamic pricing is essentially the basic principle of microeconomics – that if for a given price the demand is higher than supply, then a higher price could be charged and vice versa,” he says. “There are many subtleties. For example when there is high uncertainty of demand/supply/quality, dynamic pricing can be used to determine the appropriate price.”
In other words, dynamic pricing is a mechanism that enables the price of a commodity to change over time due to fluctuations in demand. And it can be used in a predictive manner to anticipate proper price levels based on models fueled by historical data that quantify the impact of myriad factors – ranging from the weather to a starting pitcher’s Q-rating – on consumer demand. That’s how American Airlines first used the strategy back in the 1980’s, according to Gupta.
“American Airlines was probably the first one to start using dynamic pricing in the consumer-facing arena,” he told WalletHub, highlighting the company’s use of a strategy called yield management to predict demand and properly price commodities across different consumer segments. “Starting in the 1990’s, all kinds of travel-related services (hotels and other airlines) started using similar approaches. The advent of the Internet in mid-90’s proliferated the use of dynamic pricing.”
Transforming Event Pricing
The application of dynamic pricing now stretches across industry, from travel providers to local governments. “Many cities use dynamic pricing to access HOV lanes for single drivers based on traffic conditions,” Gupta says. But perhaps the most interesting and fastest-growing use of dynamic pricing is in the sports world, particularly professional baseball.
In 2009, the San Francisco Giants became the first professional sports franchise to incorporate dynamic pricing, hiring the software-as-a-service data analytics firm Qcue to help boost ticket revenue in the face of the Great Recession’s assault on household budgets and technological improvements in the at-home viewing experience. Revenues increased $7 million in 2010 – the first year predictive pricing algorithms were applied throughout the whole ballpark.
Those results aren’t out of the ordinary either, as Qcue reports helping clients increase revenue by an average of 30% in high-demand situations and 5-10% in low-demand situations. That, of course, sounds pretty good for the corporations that use dynamic pricing, but what about me and you?
Unfortunately, dynamic pricing is a one-way street for many of the sports franchises that use it. Ticket prices will rise as high as demand takes them, but they won’t fall below face value.
Ask The Experts: Inside the Future of Dynamic Pricing
With many a consumer eschewing high prices at local stadiums, arenas and theaters in favor of the comforts of home, and dynamic pricing conferring impressive benefits upon its users, it’s fair to expect that the strategy will gain increased traction both in the sports world and beyond in the years to come.
Where might we see it applied next, and what does this mean for consumers’ wallets?
For insight into those questions and more, we turned to an esteemed group of experts in the fields of management, marketing, economics and information systems for insight. You can get to know them and check out their thoughts below.
- Current Uses of Dynamic Pricing
- Future Applications of Dynamic Pricing
- Are Dynamic Prices Good for Consumers