Dynamic Pricing Explained: Benefits, Ethics & AI Future

Podcast Summary

This podcast episode provides a comprehensive overview of dynamic pricing, led by marketing professor Marco Bertini. The discussion begins with the historical context of dynamic pricing, explaining that it was the norm before the invention of the static price tag. Professor Bertini details the reasons companies adopt this strategy, which include not only maximising profit but also improving customer access to goods and managing demand. He addresses the ethical considerations and consumer perceptions, emphasising the importance of transparency and framing. The conversation also covers the data requirements for implementation, the future of dynamic pricing in an age of AI, and situations where it might be inappropriate. The episode concludes with a personal segment about Professor Bertini's career path and his upcoming book on customer-centric revenue generation.

Key Points

• Historically, all pricing was dynamic, involving negotiation, until large department stores introduced static price tags for efficiency.
• Modern technology has enabled a return to dynamic pricing on a large scale.
• Companies used dynamic pricing to align prices with customers' fluctuating willingness to pay, which is influenced by various factors over time.
• The strategy's purpose extended beyond profit maximisation; it was also used to improve access to services (like healthcare or electricity) and to manage demand and customer experience (like at Disney theme parks).
• Consumer perception of dynamic pricing was largely dependent on whether they felt they were getting a good deal. Framing was key, with "plunge pricing" (prices only go down from a benchmark) being received more positively than "surge pricing" (prices only go up).
• Transparency was presented as crucial for ethical implementation; hiding the pricing mechanism was a sign that the strategy might be exploitative.
• To implement dynamic pricing, companies needed observable data that served as a reliable, cost-effective, and timely proxy for customers' hidden willingness to pay.
• The future of dynamic pricing could involve consumer-side AI agents or "shopping robots" that demand dynamic pricing from retailers to secure the best deals for their users.

Podcast Transcript

Transcripts are auto-generated.

Kiran Kapur, Host (00:01):
Hello and welcome. This week we are discussing dynamic pricing.

Marco Bertini, Professor of Marketing at Esade (00:05):
So as a company, I may want to price dynamically because I've got a sense that people's willingness to pay for my products is moving through time because of their conditions, because the competition is moving around, there are factors that are determined by willingness to pay and that change over time.

Kiran Kapur, Host (00:20):
I did a podcast a little while back on the dynamic pricing of ticketing, which developed quite a few questions from listeners. So we're going to review dynamic pricing, and I'm absolutely delighted to welcome Marco Bertini, who is Professor of Marketing at Esade Business School in Barcelona and also Senior Advisor at Global Practise. Marco, welcome. I believe you are in Barcelona.

Marco Bertini, Professor of Marketing at Esade (00:44):
I am. First of all, thank you very much for having me on the podcast. And yes, I'm in Barcelona enjoying the warmer weather than we had a few weeks ago with short sleeves.

Kiran Kapur, Host (00:57):
You are indeed. I'm wrapped up in a jumper, so that tells you the difference between Cambridge and Barcelona.

Marco Bertini, Professor of Marketing at Esade (01:02):
Yeah.

Kiran Kapur, Host (01:03):
Can we start with a bit of a background of what sort of products were traditionally dynamically priced? Because I think it's changing.

Marco Bertini, Professor of Marketing at Esade (01:10):
Everything.

Kiran Kapur, Host (01:12):
Okay.

Marco Bertini, Professor of Marketing at Esade (01:12):
No, no. And I mean it, I'm not just being dramatic. I mean, if you say traditionally, let's define traditionally, right? So if you go back to the late 1800s, everything was priced dynamically because there were no sticker prices. So everything that you wanted to purchase would involve some sort of negotiation, which means that the price is dynamic, because it changed with time through the negotiation. And then we decided to have really big stores. In the later, we wanted to have department stores and the John Lewis's of this world and whatnot. And so when we have big department stores, you cannot really negotiate everything. It's kind of like it becomes a nuisance more than anything else. So we invented the price tag. And now the price tag back then with the technology, we had then meant that the prices were pretty static because you cannot go around the store and change physically all them ... So now, by the way, even though they were static, I mean, strictly speaking, the prices were still dynamic because even if you like John Lewis, for example, you run a promotions after Christmas and before the summer, that is dynamic.

(02:20):
It just happens to move only twice, but it's still dynamic. And then so you've got to move the clock forward and you get to today, we have all this technology available to us. I'm sure maybe we'll get into this later, but you have all this information about people, you can react faster. And so therefore, we no longer have the physical price tag. We can use the digital shelf tag. And so now all of a sudden we can go back to the bazaar years and start pricing as dynamically as we please.

Kiran Kapur, Host (02:48):
I love the idea of a bazaar being dynamic pricing. You're absolutely right. That's exactly what we're doing when we're haggling to get something. So why do companies ... Let's really start with the basics. Why do companies even think that dynamic pricing is a good thing to do?

Marco Bertini, Professor of Marketing at Esade (03:02):
Sure. So if you ask a person in the streets or a politician, God forbid, about dynamic pricing and why, the answer is very simple, but to make more money. And that's clearly one of the goals, but there's two sides to that equation. So just purely economically ...

(03:21):
So as a company, I may want to price dynamically because I've got a sense that people's willingness to pay for my products is moving through time, because of their conditions, because a competition is moving around for whatever fact. There are factors that determine my willingness to pay and that change over time. So as a company, I'm thinking to myself, well, yes, if somebody's willing to pay more for my product at time two, than at time one, then maybe I should charge a little bit more. And we can have a discussion whether that's fair or not fair, perceived to be fair or fair. But then the other side of the coin is, yeah, but if at time three, my willingness to pay has gone down for whatever reason, or the followers of static pricing should say, no, don't touch it. Don't have them have the product.

(04:05):
They can go without the product. So dynamic pricing, what it also does, of course, is improves access to things. And we may not care for everyday items, but if you're in the business of healthcare or if you're in the business of electricity or if you're in the business of education, maybe you do want the ability to price dynamically down in order to improve the access of people or managing queues or managing stockouts or any of those things. And I can go on. On the economic side, you've got margin and volume. You got both sides because prices are moving. Then of course you've got other things like more psychological things like, well, if you got dynamic pricing, then people who really like to negotiate because they get enjoyment from their bargain hunters, we call them, right? Then they will actually get utility from dynamic prices. Or if you're Disney, you might say to people, look, I'm going to dynamically price access to my theme parks because I don't want everybody coming on the weekends.

(05:03):
And say if I spread out the people across the week, then people who are going to have a better experience with my product if I dynamically price, which is kind of cool because you dynamically price and people's enjoyment of the product changes.

Kiran Kapur, Host (05:16):
Yes. And you're right. When you talk to politicians on the band on the street, it would be very much it's all about money. But you're right, trying to spread out the use. My hairdresser is cheaper at nine o'clock on a Monday morning because very few people want to get up to have their haircut from nine o'clock on a Monday morning. So her options are she opens later, but she's still got the overhead or she opens at nine and charges less.

Marco Bertini, Professor of Marketing at Esade (05:40):
Yeah. I mean, and the devil's going to be in the detail in a lot of these things, but I always, at least with my own students, I always tell them, look, the starting point is the following. I assume that if you run a business, you invest some money in coming up with products and services that are supposed to improve the life of your customers in some way.

(06:00):
Okay. What ends up happening is that the life of your customers improved a lot to some customers and a little to some customers, and that might change through time. So what? Should we just not worry about that and price constantly? Or should we say, "Well, customer, if you get a lot of value from my product and service today, maybe I should share in that value with you and vice versa. If you get a little value from it tomorrow, then maybe I should also adjust my own prices." So from that starting point, I don't think there's anything necessarily wrong with that, but then of course the devil is in the detail. So how transparent I am, am I really doing that or I'm doing something a bit more exploitative? I mean, of course, then we can get into the details.

Kiran Kapur, Host (06:41):
Okay. So let's get into some of the details and some of the ethics around this. So if I'm fixed pricing, but my competitors are dynamically pricing, that puts me at a bit of a disadvantage, doesn't it?

Marco Bertini, Professor of Marketing at Esade (06:54):
Well, what will happen is that I will look cheaper when the other person is dynamically pricing up and I will look more expensive. So what's going to happen is I'm going to attract disproportionately high value customers. So if for example, and then you have to decide whether it's a good thing or not. So you're going to attract people that otherwise will be paying more because their valuations have been discovered. And then you have to ask yourself what's driving that valuation. Imagine that valuation is driving usage. So imagine you're an AI software business and you want to statically price. All of a sudden, the people that you do a lot of consumption of compute power realise that with one supply, they're going to be charged more because they consume a lot, but now they discover you are keeping your price aesthetic, so they're going to come to you.

(07:42):
And so you are statically pricing, all of a sudden you've got disproportionately a lot of customers that use a lot. So your costs are going to go through the roof, which means you're going to have to put up your prices in an economic world. And then of course there's all sorts of frictions and whatnot, but that's kind of the ... And insurance, it plays out exactly like this, by the way. So it depends on the sector. So in any case, I will look cheaper when prices are high and I will look expensive when prices are low.

Kiran Kapur, Host (08:11):
So in your experience, I know you've done a lot of research in this area, how does users, consumers, customers feel about dynamic pricing? Are they generally in favour? Are they generally think actually it's exploitative?

Marco Bertini, Professor of Marketing at Esade (08:23):
Yeah, it may not be that surprising. So in the sense that the answer is, if I'm getting a good deal, I think it's great. If I'm not getting a good deal, I don't think it's great at all. So I think if we were to ... I don't actually know if there is research on this, but my assumption would be that if you were to ask people baseline, what do you think about dynamic pricing? It's probably been on the negative side. And that's true, probably a lot of things that companies could do because the inclination is to think the companies that are to get me, which may well be the case, of course. I mean, I'm not a stouched defender of companies in any shape or form, right? So therefore my initial inclination might be on the pessimistic caution side. But that said, there's lots of data to show that people, yes, if they get a better deal, they're not going to say, no, no, no, it can't be.

(09:12):
Increase my price. I don't like this dynamically priced down. It just doesn't ... I don't like it. Which then, by the way, opens up an interesting issue because ... So if you think about dynamic pricing just generically, prices vary according to valuations up and down. But of course, some companies may decide to say, okay, no, no, no. I have a static price and then I only surge price. So this is Uber.

(09:39):
So if that's the case, then more than likely your customers are not going to be very happy about it because all they see is the price going up. The benchmark is flat and the prices go up. But if I am, I think Octopus does this in the UK, so I have plunge pricing, then my prices only go down, then I'm going to have a different reception to dynamic pricing because I see the price is only going down. I may not like the original price because it's higher, but hey, I like the dynamic version of it. And so it opens the door already for this discussion around framing. How do I frame something that is dynamic? Basically, where is the benchmark? Where is the normal scenario?

Kiran Kapur, Host (10:20):
And of course, you then get caught up in a lot of pricing requirements and regulations about ... And in the UK, there's been a lot of work on making certain that everything is transparent for consumers. So if you, as you say, it's all about framing it and being very clear about where your base price is, your standard price before you surge up or plunge down.

Marco Bertini, Professor of Marketing at Esade (10:42):
Yeah, no, absolutely. And just like earlier, I was saying that I start from the perspective that a company should be able to earn in a manner that is commensurate with the value that it delivers, and because value is flexible, then charging should be flexible. I'm a believer in that. Just like I'm a believer in that, I'm also a believer that a company shouldn't, because of that, what I just said now, there is no reason for a company to hide the way it charges. So it both goes away. It goes both ways. If you're doing something that is pegged to value and you think that's fair, then there's no reason why you should be hiding what you're doing. It's just part of your proposition. And if you're hiding what you're doing, it's probably because maybe there's something fishy going on. I would assume that would be my starting point.

(11:29):
And again, I understand life is more complicated than that, but I think it's always useful to have a good start, what are lifes ought to be like and then why we're deviating from it.

Kiran Kapur, Host (11:40):
So if I'm sitting there thinking, actually, maybe I should be considering dynamic pricing, what sort of data would I need in order to know how to even start?

Marco Bertini, Professor of Marketing at Esade (11:51):
Right. So you would consider dynamic pricing if you have a sense that, again, valuations tend to are not constant, they tend to fluctuate, and they fluctuate enough that you get a sense that you're leaving money on the table, leaving money or customers on the table. So both sides of that thing. So if you got that inclination, then you should probably be thinking about it. And if you're thinking about it, then what you need is ... Because we unfortunately in a marketplace, a company will never observe willingness to pay directly. It's a latent variable. It's something that is hidden. Unless somebody decides to tell you what their willingness to pay is, which is unlikely to happen. It's never going to happen, or it's not on your forehead either. So it's going to be latent. So that means that I need variables that essentially, without getting too technical that correlate with willingness to pay, that I can observe.

(12:41):
So I need a proxy. I need a proxy within needs to pay. So then when we talk about data, we need several qualities. We need to decide what that proxy might be. And so it has to be a relatively good proxy. It means that it has to go up and down in tandem with the valuation, otherwise it's a bad proxy. So that's one thing that it needs to be. Then it needs to be relatively cost-efficient to collect. If it's very expensive to collect, then whatever benefit I stand to gain from the name place, I will lose because of cost. And then I like to keep it separate from the cost. It has to be practical in a sense that, especially with dynamic pricing, it is no use to me to discover your willingness to pay after the transaction would've occurred. So it needs to be, because dynamic price is a question of time.

(13:34):
So I have to understand that ahead of time what your valuation will be so that I can then change my prices at the moment your evaluation is what it is. And that's where technology is coming in today. In many dimensions, I can collect many more information that are good proxies that we need to pay. I could collect them more cheaply than I was before. And very importantly, I can process them and lead to a price much with the lag period is much shorter than it used to be.

Kiran Kapur, Host (14:06):
That of course is an extremely good point because if you can't predict it beforehand, as you say, then I've spent the money or I haven't spent the money. There is no point in having dynamic pricing retrospectively.

Marco Bertini, Professor of Marketing at Esade (14:18):
Exposed is like hindsight 2020, but it doesn't help us. And so this is the land of algorithms and all these things that we read about in the press.

Kiran Kapur, Host (14:29):
So what do you think ... You've just indicated that obviously we can get more data, we can understand things more. What do you think the future is of dynamic pricing?

Marco Bertini, Professor of Marketing at Esade (14:42):
So I think that the future of dynamic pricing might be, in a way, more of the same, in the sense that if you think of technology as an enabler, then what's happening is it enables it more, more proxies, less cost, faster, shorter leg periods. So more of that. On the other side, what might be an interesting but speculative sort of comment is to say is thawith the onset on Agentic AI and all these things, so the consumers who were complaining paradoxically, the consumers who were complaining about the companies implementing dynamic pricing might want their own shopping robots to ask companies to price dynamically. Because if I tell my shopping robot, "Hey, go out there and find me the best deal possible," most likely my shopping robot will contact a bunch of retailers and sort of say, "Well, fight for it, fight for my business, and that will lead to ... " So that will literally be my shopping representative, which is a robot, demanding dynamic pricing, so they can time the purchase to my benefit.

Kiran Kapur, Host (15:55):
Gosh.

Marco Bertini, Professor of Marketing at Esade (15:57):
It's a bit perverse, but it's kind of where it's going. So you'll basically end up having a world where because you've got robots selling and buying decisions, and robots understand perfectly well that there's a gain inefficiency by having prices not being static, then you'd have dynamic prices on both ends.

Kiran Kapur, Host (16:19):
Yes. Yes, I could see that. As you can tell, I needed a moment to get my head around that one. That really is quite amazing. So are there any markets you can see that dynamic pricing couldn't be introduced or is it just when the data is there?

Marco Bertini, Professor of Marketing at Esade (16:37):
The modern markets, and I would have to think about this and I don't want to understand something necessarily silly all of a sudden, but my guess is there are, for example, humanitarian situations, more like situations than markets. So if there are humanitarian situations where you need to provide access to certain things in a hurry to people that don't necessarily have the means, because you're not going to dynamically price because the situation is calling for a very low price and a fixed one across. So any situation where basic ... So basically, in a sense, any situation where the willingness to pay of people is capped, not because they don't necessarily appreciate your product more or less, but because their means are actually quite homogeneous, then that dictates terms and you need to have a static price, or any situation where the pricing decision is so in the public domain and the public opinion is so much against the companies and potential for exploitation, that basically might be in your best interest to forego whatever you're foregoing to have a static price, to have a sale essentially.

Kiran Kapur, Host (17:49):
That makes perfect sense.

Marco Bertini, Professor of Marketing at Esade (17:51):
Yeah. And then if I think about it, because basically if you think about it, I mean, again, I'm one of the people that sort of takes an efficiency perspective. And I know that if prices are allowed to change freely in a sense, it should add efficiency. So it should help people, but maybe there's an optimal point, right? Maybe if you change prices every two seconds, that just creates too much ... Actually, instead of taking away friction, it adds friction.

Kiran Kapur, Host (18:16):
Thank you. That was a really great overview of dynamic pricing. Thank you. Before I let you go, I wanted to ask a question about your career, because I had a couple of learners that actually asked, how does one become a marketing academic? So Marco, how did you become a marketing academic?

Marco Bertini, Professor of Marketing at Esade (18:33):
Well, that's an excellent question. Nothing to do with dynamic pricing. So I guess I became academic dynamically, but I don't know if to what extent my own experience is idiosyncratic. So not that I didn't want to be, I didn't have the desire to be. I wasn't born thinking, "Oh, I'm going to be a marketing academic." First, I used to play basketball, so I was relatively good at it. And so I always thought that I'm going to be some sort of professional basketball player. And then I got injured, so that was a bit of a problem. So that was first career change.

(19:14):
Also, others that grew to be taller than me around me. So maybe it was a blessing more than something else, but at the time it didn't feel like one. So then a change, a career plan. And so I decided to do an MBA programme. That's when I moved ... I grew up in Australia, even though I'm Italian. I grew up in Australia, and I came to do an MBA here in Spain, and I was really dead set on becoming a consultant or an investment banker or one of those things, but that's what everybody was doing. And then I went to all the interviews and I kind of realised that wasn't for me. So I learned something about myself then, which is maybe first learning point, or reflect about the kind of things that you like, and then try to match the things that you like with your career.

(20:02):
So I realised I don't like to have a boss necessarily, which I guess which might be normal for everybody. I do not like having structured working schedules. So for example, my wife likes that a lot. I'm not like that. I don't like to know that I need to work from nine to five and somebody's overlooking my shoulder. So I don't like that at all.

(20:23):
I like flexibility in doing different things. And so because of these things that I decided, I realised that I liked about working, the jobs that I was, the interviews that I was doing, the jobs were not really providing that. And then it really was happenstance. I was in a class in my second year of the MBA programme, a class in managerial accounting of all things. And the professor was talking about how as a business school professor, he had no real schedule apart from having to be in class when he had to be in class, has no real boss because he has tenure. And then he can compliment his salary from professor by doing maybe some work with some companies or some speeches or whatever. And so you put all these things together, and that sounds pretty interesting. Let me find out more about this. And then of course you discover you have to do a PhD, which is oops.

(21:14):
It's after doing an MBA thing, okay, now five more years of ... But again, I mean, and then it's a question of whether you're up for it or not. If you're a person that you're curious, you like the idea of science and discovering things, you like the idea of helping people in terms of in a classroom and teaching. I think you have to have devocation of trying to help people understand things. I think it's basic. After the MBA programme, I applied to the PhD programmes, and then I got into some of the PhD programmes, and that's it. I haven't looked back since then.

Kiran Kapur, Host (21:47):
Thank you. I think that proves that academics have squiggly careers as well. We don't wake up going, "That's what I want to do. "

Marco Bertini, Professor of Marketing at Esade (21:54):
No, not at all. Well, maybe yes. Maybe yes, it just literally wasn't my case.

Kiran Kapur, Host (21:58):
Yeah. And I understand you have a book coming out.

Marco Bertini, Professor of Marketing at Esade (22:01):
Yeah. So I have a book with, I work with friends and co-authors, one at London Business School close to where you are, and then one in Harvard Business School. And we have a book called Payback, which is How to Turn Customer Satisfaction into Lasting Revenue, which is basically a book about kind of the things that with this dynamic pricing is an element of that, but it basically sort of says, look, if you're a company, let's assume you're a nice company, you make investments to improve the lives of people in some meaningful way or the lives of businesses if you're in a B2B sector. Kindly, you need to generate some sort of revenue payback from your marketplace because you want to keep doing it tomorrow. You maybe have investors to pay, maybe you want to invest in social or environmental things. So how do we think about this question of generating revenue from customers?

(22:54):
Knowing that you don't want to lose them, you want to have enough revenue, you don't want to have too much revenue. So how do we think about this question? So the book being called Payback basically walks you through a model of customer centricity. So for our listeners and learners who are marketers, it's really about customer orientation, but not the classic customer orientation, let's listen to the market, let's develop products. It's okay, now that you've done that, how do you carry through the customer orientation all the way to an economic return? So if I'm going to do dynamic pricing, for example, how do I think about customers as I do this? Because I don't want to lose them. So how do I communicate to them? What are the right things to do, the wrong things to do? Yeah.

Kiran Kapur, Host (23:37):
And as you say, if you don't have customers, you don't have income, you don't have a business or an organisation. So yeah.

Marco Bertini, Professor of Marketing at Esade (23:43):
I mean, yeah, it's a classic marketing sort of speech, but I don't think that much we think about customer orientation from a financial perspective. We know that it's supposed to drive our business because all these insights come from the jobs to be done of our customers. But yeah, but still the number one headache of most chief marketing officers around the world has nothing to do with AI or geopolitics. It has to do with how do I demonstrate the impact of what I do in an organisation? And that's exactly what a book tries to do.

Kiran Kapur, Host (24:18):
Fantastic. Marco Bertini, thank you for a dynamic discussion of dynamic pricing. Thank you very much indeed, and I look forward to the-

Marco Bertini, Professor of Marketing at Esade (24:24):
Dynamically, thank you.