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September
18
2023

The rise of surge pricing: ‘It will eventually be everywhere’
Philip Georgiadis

Powered by algorithms and AI, a growing number of consumer industries are adjusting prices in response to supply and demand.

As surge pricing spreads from concert tickets for stars like Harry Styles to even pints of beer, debates have increased on the ethics of the strategy.

For drinkers at the Coach House in central London on a busy work night this week, there was an uncomfortable piece of news to digest: the price of Britain’s favourite alcoholic beverage had just gone up — again. 

Stonegate, Britain’s biggest pub company which runs the Coach House, has announced it will charge pubgoers 20p extra for a pint of beer on busy evenings and weekends. It is part of what it called a new “dynamic pricing” policy in some of its venues.

This has come much to the annoyance of some of its regulars. “It’s not right; we’re being done over enough on beer as it is,” says Adrian, a 37-year-old brand marketing manager, who has nipped into the pub near Piccadilly Circus after work. Sipping a £6.25 pint of Heineken, he admits that after the fuzziness of a few more drinks he might not even notice the price increase as the pub fills up. 

“It just fleeces people trying to enjoy themselves,” he adds.

City workers enjoy a drink outside on a summer’s evening. The rollout of surge pricing in one beloved British boozer
has reignited debate around the ethics of the strategy © Charlie Bibby/FT

“Dynamic” pricing, as many in industry call it, or “surge” pricing as is more widely known by consumers, whereby businesses flex prices at particular times in response to shifts in supply and demand, is not a new phenomenon. It has been used by airlines in the US, for instance, since 1983 when the US government relinquished the power to set domestic airfares. 

When booking flights and hotel rooms, consumers have become accustomed to the rhythms of the dynamic pricing model: book early or during the shoulder season and get a good deal; book last-minute or during the busy holiday periods and get penalised.

However, powered by algorithms and artificial intelligence, it is being introduced at a rapid pace by a growing number of consumer industries. Amazon changes the price of its products on average every 10 minutes, using millions of real-time data points to benchmark against competitors and track demand surges. 

“It will eventually be everywhere,” says Robert Cross, who created a computerised dynamic pricing model for Delta Air Lines in the early 1980s before doing the same for hotel giants Marriott, Hyatt and InterContinental Hotels Group. 

As high inflation erodes margins and improvements in technology make dynamic pricing cheaper and more practical for businesses to implement, the temptation to deploy the pricing strategy is growing in industries that have so far remained largely untouched by the method. Bars, restaurants and bricks-and-mortar retailers have historically only adopted dynamic pricing for basic discount offers, but that could change. 

“If you’re a business, it’s irresistible because it will improve your margins and it’s in the consumer’s best interests too,” argues Cross, who chairs a revenue management company. “Anywhere there is a mismatch between what a customer is willing to pay and the actual price is ripe for dynamic pricing.” A 2018 study by researchers at Massachusetts Institute of Technology found that dynamic pricing boosted airline revenues by between 1 and 4 per cent, compared with traditional pricing.

The rising price of a pint

Average retail price of draught lager in the UK (£ per pint)

However, the furore this week about the rollout of surge pricing in a beloved British boozer has reignited debates around the ethics of the pricing strategy and whether it is rigged against the consumer. 

In some industries, dynamic pricing has proved less palatable. Ride-sharing app Uber refunded users in central London after its pricing engine briefly surged fares in the aftermath of the London Bridge terror attack in June 2017. 

Fans trying to bag tickets for arena tours by Beyoncé, Coldplay and Harry Styles in the past year have expressed frustration over the wild fluctuations in Ticketmaster’s dynamic pricing model, which resulted in some paying more than double the face value. Ticketmaster’s parent company Live Nation Entertainment is being investigated by the US justice department as part of an antitrust probe.

Marco Bertini, a professor of marketing at Esade business school in Barcelona who advises Boston Consulting Group on pricing practices, agrees that dynamic pricing will only become more common. But he warns companies to be aware of the pitfalls, including the way that such pricing is explained to customers.

“The question is making sure there’s no secondary effect, like people getting pissed off and not understanding [the pricing method],” he says. “The devil is in how it’s communicated because you’re trying to get this customer to come back tomorrow.”

A question of fairness

For most of the history of human commerce, dynamic pricing was the norm, with customers haggling and bartering with vendors over the price of every item. But in 1876, inspired by notions of equality, Quaker merchant John Wanamaker introduced price tags at the launch of his eponymous department store in Philadelphia. Macy’s, the iconic New York-based department store, also under Quaker ownership at the time, did the same. 

Beyond high-minded ideas of fairness, fixed prices allowed the stores to save on years of training for shop clerks in price negotiation, which in turn enabled faster expansion. The price tag quickly caught on. 

Now, however, with advancements in data collection and the transition of commerce online, businesses are reverting to the historical norm and pivoting away from the fixed price.

There is also still room for growth: while retailers in the US have embedded dynamic pricing into their operations more widely, Europe still lags behind, according to Pini Mandel, chief executive of Israel-based Quicklizard, whose dynamic pricing tools are used by the likes of Ikea and Sephora. 

More than half of retailers use it in the Nordic countries, about 40 per cent in Germany, Austria and Switzerland, but only 15 to 20 per cent in the UK, according to Mandel. “Inflation is the reason why the UK, which is the most conservative market when it comes to dynamic pricing, is also joining the revolution,” he adds. 

One UK hotel group chief executive says complaints about dynamic pricing for room bookings are rare as consumer awareness has grown. “Now, I think customers generally get it in a way that they didn’t before,” he says. “Customers . . . understand that the earlier you book, the better the deal is.” 

Dermot Crowley, chief executive of Dalata hotel group, which manages 52 hotels across the UK, Ireland and Germany, says despite the widescale uptake of dynamic pricing among hotel groups, even they have erred away from introducing surge pricing on food and beverage.

“When you’re deciding to stay in a hotel, it’s a big part of your weekend away, that’s the price and you can budget accordingly,” says Crawley. “If you buy a drink and then it gets more expensive, that leaves a different impression.”

Some 52 per cent of 901 US consumers surveyed by software company Capterra this year said they regarded dynamic pricing in restaurants as equivalent to price gouging. Despite the negative reaction to Stonegate’s new pricing policy, Alex Reilley, chief executive of casual dining group Loungers, says price discrimination is more common in the hospitality industry than most operators let on. Stonegate, which owns the Slug and Lettuce and Craft Union chains, had previously rolled out the same pricing strategy on a temporary basis during the 2022 football world cup, upping the price of a pint by up to £1. 

A spokesperson for Stonegate said that using dynamic pricing also meant it could offer promotions on food and drink throughout the week and helped offset higher running costs when it was busy.

“I think Stonegate have almost fallen foul a little bit because of their honesty because there are lots of operators, particularly in city centre locations that do exactly the same and it’s not exactly a new phenomenon,” says Reilley. “I wouldn’t necessarily see this as Stonegate taking the piss. It’s them thinking about ways they can generate extra revenues . . . given the pressure they are under.”

Seth Moore, former chief strategy and analytics officer at online retailer Overstock.com, says the backlash that Stonegate has faced is more a result of the way it communicated the price change. 

“If my pub goes out and says, ‘Before 7pm, we’re serving drinks 25 per cent off’, nobody objects to that,” says Moore. “In general, it’s better to market it as a discount off prime rather than an increase on prime.”

Threat of manipulation 

In the period that surge pricing has been in operation in the airline and hotel industry since the 1980s, prices have largely declined with the rise of low-cost airlines and budget hotels and consumers have grown accustomed to the pricing model. 

“Back in the day, only the wealthy people travelled,” says Cross, formerly of Delta. “Now, everybody travels and that’s thanks to dynamic pricing.”

Dynamic pricing has been used by airlines in the US since 1983 when the government relinquished the power to set domestic airfares © Mario Tama/Getty Images

But there are signs that consumer and regulatory tolerance could be waning because of the sharp rise in prices over the past year.

Italy’s rightwing government sparked a furious row with Europe’s airlines last month after outlining plans to cap fares on flights between mainland Italy and the islands of Sicily and Sardinia at 200 per cent of average prices. The government said that ticket prices had risen 70 per cent on those routes.

The plans to intervene in the market were unusual, but followed a drumbeat of questions over airlines’ pricing models this year. The Spanish government has also laid out plans to limit fare rises on some domestic routes, while the European airport trade association has called on the European Commission to “monitor” the level of air fares.

“As a consumer, I understand why people don’t like paying more for things . . . but it is important to understand that it often allows the same business to charge less during another time and create more access to whatever it is,” says Jonathan Ayache, chief executive of South African airline Lift and a former senior executive at Uber. 

For many retailers with a large bricks-and-mortar estate, dynamic pricing is still in its infancy, as it involves having to physically change labels, a costly endeavour. But the uptake of so-called electronic shelf labels, offering the ability to rapidly update prices, is spreading. Walmart is installing digital labels in 500 of its stores and France’s Carrefour has been using them for years.

Bruce Springsteen performs at MetLife Stadium in East Rutherford, New Jersey, in August. He angered fans last year by adopting dynamic pricing for a tour for the first time, pushing ticket prices as high as $5,000 © Manny Carabel/Getty Images

But greater reliance on algorithms to price products could have downsides. A 2021 research paper published by the Competition and Markets Authority, the UK watchdog, concluded that while pricing algorithms have “enhanced efficiency”, companies “may also misuse them, whether intentionally or unintentionally, and can cause harms to consumers and competition, often by exacerbating or taking greater advantage of existing problems and weaknesses in markets and consumers”.

A push towards more dynamic pricing has proved unpopular for ticketing platforms. In the UK, 71 per cent of 1,523 music fans surveyed by polling company YouGov late last year said they were either strongly opposed or tended to oppose surge pricing for concerts. Rock star Bruce Springsteen angered fans in the US last year when he adopted dynamic pricing for a tour for the first time, leading ticket prices to surge as high as $5,000.

Robert Smith, lead singer of the Cure, who this year convinced Ticketmaster through a social media campaign to refund service charges to his fans, stressed that he had avoided dynamic pricing, calling it “a bit of a greedy scam”. Taylor Swift, the second most streamed musician globally, opted not to use dynamic pricing model for this year’s Eras tour after it dragged on sales and angered concertgoers during her 2018 tour. 

Some ticketing industry figures are unrepentant. “It’s called the ticket business, it’s not called the ticket fan club. Nobody pays more for a ticket than they want,” says Fred Rosen, who built Ticketmaster into a behemoth in the industry before leaving as chief executive after 16 years in 1997. “It’s not the ticket companies that set the prices, it’s a simple supply and demand curve.” Rosen predicts that despite some pubgoers “moaning” about dynamic pricing, the pubs “will still be full”. 

But others question whether the intrusion of dynamic pricing into all aspects of commerce and culture represents a step too far, fearing that it could be rolled out to ever more essential goods. 

“The world is full of micro moments but they all add up,” says Phil Hutcheon, the founder of ticketing platform Dice, which shuns dynamic pricing. “People will ask, ‘Why are these tickets $1,000? Are they only available to the ultra-wealthy?’ If a beer at 6.30pm is a certain price, then an hour later it is a totally different price . . . you just start losing trust in the system.”

 

 

 

Philip Georgiadis is the FT's transport correspondent, covering airlines, airports and public transport. He was previously a breaking news reporter, and joined the FT in 2019 from the Wall Street Journal. 

 

 

www.ft.com