I dont remember a ton from my days at Western, but I do recall learning about dynamic pricing, which is a way companies maximize revenue by constantly tweaking prices over time. Its the reason why a plane ticket from Toronto to Vancouver will cost, say, $800 today and then $823 tomorrow.
The approach made a lot of sense to me at the time, since it lets businesses capitalize on the fact demand for their products or services likely fluctuates over a period. As a business student trying to get ripped for spring break, the technique was as impressive as the fat-cutting properties of the Foreman Grill. But dynamic pricing has some drawbackswhich have recently been highlighted by the research of a former game show contestant.
Eric Dolansky, who won two games of Jeopardy! and is an assistant professor at Brock University, has studied how consumers respond to a series of prices. Working with the University of Albertas Kyle Murray and Ivey Business Schools Mark Vandenbosch, hes discovered that consumers will more often choose the products of a company whose prices show an upward trend rather than those of a competitor whose prices seem randomeven if it means paying up to 40% more in the future. (For those of you who remember your stats classes, this holds despite both companies having the same median and variance in their historical prices.)
The reason? People value predictability, Dolansky says. He points out there are plenty of examples of this, such as how fixed mortgage rates are typically higher than variable ones. Companies thinking about a dynamic pricing strategy should consider Dolanskys findings. People dont like to see prices bounce around, he says. Its a big turn off.
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