Surging Prices

Technology is a marvellous thing. There are few industries that haven’t been affected by the rapid advancements in technology over the last few decades.  “Students are able to learn on a global scale without ever leaving their classrooms. Agricultural processes that once required dozens upon dozens of human workers can now be automated. Medical discoveries occur at a much more rapid rate, thanks to machines and computers.” (Belcher, 2016)

When thinking about technology, very few disadvantages come to mind. Aside from the obvious…

Terminator

Unfortunately, technology is now enabling innovative companies to abuse one of the fundamental economic principles for profit. Uber, the California based ride sharing company, https://www.uber.com/, has recently been criticised for adopting a new pricing strategy that increases prices during peak periods in order to boost company profits. See the article below on Ubers’ surge pricing.

http://www.smh.com.au/nsw/uber-says-most-new-years-eve-passengers-not-hit-with-massive-surge-pricing-20160102-gly2v9.html

Traditional pricing strategies vary between industries, products/services and companies.  Cost plus pricing is calculated by assessing the total cost to produce a unit of output and applying the required return to formulate a price. Noble and Gruca found that “cost-plus pricing was the most often cited pricing strategy (56% of the respondents)”, for high end industrial products (Noble & Gruca, 1999). Price skimming, another pricing methodology is the “strategy of charging a relatively high price during the launch of a new, innovative product and then lowering the price over time to access different points on the demand curve.” (Dawson, 2014).  A variation on the traditional price skimming strategy has been adopted by Apple, “rather than introducing their products at a high price and then lowering their prices later, Apple stakes out a price and then maintains and defends that price by significantly increasing the value of their products in future iterations.” (Kirk, 2013). The above pricing strategies are only a couple of the many options that are available to marketers, other strategies include;

  • Penetration Pricing
  • Loss Leader
  • Value Pricing
  • Competition Pricing

Ultimately the choice of pricing strategy will be ineffective if the other 3 p’s do not support the chosen pricing strategy.

A study conducted by Paat Rusmevichientong identified that the “availability of data on consumer preferences and increasingly sophisticated analytical tools enable significant increases in profit through optimization of prices. In addition to airlines and hotels who have been the traditional users of revenue management, many companies in retail and manufacturing have started to employ advanced pricing strategies to increase their bottom line.” This study occurred in 2003 which shows technology has been assisting firms make pricing decisions for a while now.

The technology that Uber has created enables them to assess product demand on a ‘live’ basis and adjust prices based on the supply of drivers. The ability to conduct demand/supply calculations instantaneously through their platform not only lets them analyse the data but then react immediately to maximise revenue and profit.

Surge Pricing

Pricing based on demand is not a new concept, however very few other businesses have been as unashamed as Uber, with a 1000% price increase not uncommon. In recent years in Australia when the AFL, NRL and A League have reached their respective grand final weekends, fans have been forced to pay large premiums to both airlines and hotels to attend. However it is unlikely that even the most passionate fans would accept n increase of 10 times the normal price.

The below article discusses the price increases due to this weekends A League grand final in Adelaide.

http://www.abc.net.au/news/2016-04-27/wanderers-fans-outraged-as-airlines-cash-in-on-a-league-final/7363664

One of Ubers main competitors, Lyft, https://www.lyft.com/, who previously capped their surge pricing at 3 times recently made a change to their pricing strategy. They have now removed the cap, effectively giving up one of their only product differentiators to Uber. The following article provides more information on Lyft’s change of heart.

http://qz.com/665093/lyft-has-quietly-eliminated-its-3x-cap-on-surge-pricing/

Unfortunately for consumers it appears that surge pricing is here to stay, we can only hope that it doesn’t make its way into other industries.

 

  1. Belcher, L.(2016). Advantages and Disadvantages of technology advances. Demand Media. Hearst Newspapers. http://smallbusiness.chron.com/advantages-disadvantages-technology-advances-12579.html. Date Accessed:29 April 2016.
  2. Dawson, T. (2014). Ride the Demand Curve: Price Skimming and Your Pricing Strategy. Price Intelligently. http://www.priceintelligently.com/blog/bid/183669/Ride-the-Demand-Curve-Price-Skimming-and-Your-Pricing-Strategy. Date Accessed: 1 May 2016.
  3. Kirk, J. (2013). Android’s Penetration Vs. Apple’s Skimming Marketing Strategies. Tech Pinions. https://techpinions.com/androidss-penetration-vs-apples-skimming-marketing-strategies/15255. Date Accessed: 1 May 2016.
  4. Noble, P & Gruca, T.(1999). Industrial Pricing: Theory and Managerial Practice. Humboldt State University, University of Iowa. http://dx.doi.org/10.1287/mksc.18.3.435.
  5. Rusmevichientong, Paat. (2003). A Non-Parametric Approach to Multi-Product Pricing: Theory and Application. Stanford University

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