Has dynamic pricing gone too far? Definitely, maybe

Dynamic pricing has left many looking back in anger lately, with some brandishing the practice as unfair. However, dynamic pricing is all around us, and can often be beneficial to all parties - how can telcos ensure that customers see it that way too?

Dynamic pricing has become a dirty word in the last few weeks following its controversial use by Ticketmaster for Oasis’ much-anticipated 2025 reunion. Now the UK’s Competition and Markets Authority (CMA) is set to investigate its use after fans, hoping to see Manchester’s most famous warring brothers, found that the price of their tickets had jumped by hundreds of pounds by the time they reached the checkout page.

Meanwhile, over in the US, presidential candidate and current Vice President Kamala Harris announced a similar investigation after senators raised concerns over Kroger’s introduction of Electronic Shelving Labels to dynamically change grocery prices.

As more and more services move to a digital delivery model, and the who, what, where and why of purchases can be quantified, stored and rigorously analysed, we must ask – has dynamic pricing gone too far?

What is dynamic pricing?

From the markets of Sumer to the first department stores, once upon a time all pricing was dynamic. This helped to balance supply and demand and allowed companies to ensure that products and services remained available, with those who were able to buy at a particular time incentivised to do so. Basing prices on demand and willingness to pay can lead to higher customer satisfaction and increased revenue for providers, who can quickly adjust prices for an edge over competitors and avoid unnecessary wastage.

While some view it as fair when it comes to non-essential services, others see it as unfair, especially when it leads to high prices during peak times – or if it stops you seeing Wonderwall live. 71% of respondents to a YouGov survey in 2022 opposed dynamic ticket pricing for live music, where many guests would likely end up paying wildly different costs for largely the same experience, in this instance.

Away from the world of live music though, dynamic pricing is all around us:

Happy hour and early bird specials
These are two classic examples of differentiated pricing from the hospitality sector, offering predetermined discounts on drinks and food during specific hours, usually in the late afternoon or early evening, to attract customers during slower periods.

Though happy hours are normally at set times and only offer discounts, last year, UK pub group Stonegate announced that some of its venues would introduce dynamic pricing, charging more for drinks on evenings and weekends but offering discounts during less busy times.

Earlier this year, fast food chain Wendy’s announcement that it would implement dynamic pricing through digital menu boards that can update in real time was met with considerable negative attention. Even though these could also be used to “offer discounts and value offers to our customers more easily, particularly in the slower times of day,” focus fell squarely on the prospect of price rises.

Transport
Uber and other taxi-hailing firms raise prices during times of high demand, such as bad weather, rush hour or major public events – as well as natural disasters and terror attacks. This in turn encourages drivers to become available, and helps balance supply and demand – in theory, that is; one study of Uber’s pricing found that surge prices had a negative impact on passenger demand and drivers would actually leave surge areas due to fewer people ordering rides.

Airlines have long employed complex dynamic pricing schemes after the deregulation of air fares in 1978; typically, ticket prices increase as the departure date approaches and the plane fills up. Believe it or not, these higher prices are to target another customer segment – business travellers – who are more likely to book closer to departure and don’t care so much for high prices. Whereas budget airlines supplement their low fares with “drip pricing” of additional fees further down the booking process. By strategically segmenting passengers, airlines can extract varying levels of revenue from the same flight using a dynamic pricing model.

Retail & ecommerce
Many online storefronts use dynamic pricing based on demand, inventory levels and consumer behaviour, to stay competitive and maximise profits. Amazon has long employed these tactics, though not without some controversy – in 2000, the firm came under fire for offering new visitors to their website discounts on popular DVDs. To regain ground against ecommerce providers, UK department store chain John Lewis is now leveraging AI to power its price matching service, which will dynamically adjust in-store and online prices every day.

Electricity
In some countries, the cost per kilowatt-hour of energy varies depending not only on the time of day, but also overall grid supply and demand. For example, Octopus Energy’s Agile scheme can provide customers cheaper power with half-hourly rates updated daily based on changes to wholesale prices, and “plunge pricing” where you can actually be paid for taking energy off the grid.

EU directive 2019/994 covers “common rules for the internal market for electricity” and mandates that member states must ensure consumers can “benefit from directly participating in the market… by adjusting their consumption according to market signals.” However, this is a directive, and only applicable once transposed into national law. Some energy firms employed this during the 2022 energy crisis, reducing the cost per kilowatt hour of electricity at off-peak times.

Simple peak and off-peak rates have been around in telecoms for a long time, so how can the industry move towards dynamic pricing?

In telecoms, dynamic pricing is most often applied at the point of sale, but not as much differentiation in levels of service and pricing. What if telcos could consider not just who is using the data, but how and why they are using it?

The marginal cost of connectivity and data services means they can be offered at variable rates without significant financial detriment, as opposed to physical goods.

This segmentation could enable telcos to maximise data revenue and better serve their clients. While data isn’t a finite resource per se, bandwidth is, and telcos may look at dynamic pricing to manage network congestion, ensuring that users who are willing to pay more can still access the services they need or desire.

Here are four approaches to dynamic pricing that CSPs should consider:

• Capacity-based pricing: Offering cheaper rates during periods of low network consumption to encourage usage or to spread some of the load away from busy periods.
• Location-based pricing: Automatically changing prices based on the user's location, considering factors like network coverage and local competition.
• Usage-based pricing: Tailoring prices to individual consumption patterns, such as offering lower rates to incentivise light users or charging premium rates (sometimes “overage”) for heavy users.
• Value-based pricing: Whereby pricing reflects the amount consumers are willing to pay, meaning those who can pay more do pay more, while those who are unable to won’t be priced out. As with air travel, customers may pay more for a seat with more leg room or priority boarding, but all passengers get to the same destination at the same time – their experience is the differentiator.

However, to be effective and gain customer acceptance, dynamic pricing must be transparent to the user. Proactive notification of price changes is a necessity to drive changes of behaviour. For example, “Buy a speed boost now, half price until 8pm.”

The impact of technology

It’s not only the intrinsic value of the product or service itself that informs prices, but the data collected on customers. With the rise of AI and big data analytics, telecom companies can now implement dynamic pricing strategies more effectively, allowing real-time analysis of demand and supply, and rapid price adjustment based on changing conditions.

With the increasing demand for mobile data, particularly for streaming and gaming, dynamic pricing could help manage slices of network traffic more efficiently. If there’s a spike in data usage during peak hours, telcos can adjust data prices to encourage users to shift their heavy data consumption to less congested times.

While this can improve service delivery and efficiency, it also raises concerns about the potential for abuse. Without proper oversight, dynamic pricing models could easily tip over into price gouging if companies prioritise profit over consumers – look no further than Coca-Cola’s infamous vending machine that would automatically raise prices during hot weather.

Can telcos make dynamic pricing work?

While surge pricing can be a legitimate strategy for balancing demand and ensuring service availability, it must be implemented transparently and ethically to avoid crossing the line into gouging territory, so services remain fair and affordable.

Customers are used to paying fixed prices for their services, often through all-you-can-eat bundles, and the idea of dynamic pricing could be confusing or frustrating. To avoid uncertainty, telcos must ensure that pricing remains simple, transparent and easy to understand.

Dynamic prices are far more tolerable, sometimes even preferable, for irregular or one-off purchases, such as airline tickets or hotel rooms. However, when it comes to recurring purchases such as food and transport, consistency is valued. Offering tools like real-time usage monitoring and cost calculators can help customers stay informed about their usage and how much they are being charged.

To overcome this, CSPs need to communicate the benefits of dynamic pricing clearly and transparently, showing customers how they can save money by taking advantage of lower rates when the network is less busy.

Switching to dynamic pricing would allow CSPs to better align pricing with customer usage patterns and optimise their network consumption, reducing the risk of congestion. Customers gain more control over their telecom expenses, paying only for what they actually use or opting for higher-quality services when needed, no longer subsidising heavy users through enormous bundles they never fully consume. Instead, everyone would see real-time price changes and be able to make informed decisions about their usage.

Transparency means customers are more accepting of price changes if they know what the variables are. Whether it’s booking a smaller taxi, taking no suitcase on a plane, or heading to their local bar a couple of hours early – when customers understand the circumstances, they're more likely to accept a degree of variability.

While there are challenges in its implementation, we can expect dynamic pricing to become a more prevalent strategy in the future, reshaping the way customers pay for and consume their communications services.

Most importantly, telcos must remember that dynamic pricing can – and should – apply in both directions.

Update [09/10/2024]: Several airlines in the United States have capped the price of hundreds of flights ahead of Hurricane Milton's landfall in Florida, with Joe Biden warning firms "not to engage in price gouging."

Update [30/09/2024]: Following the backlash to inflated ticket prices for the UK and Ireland leg of their 2025 reunion tour, Oasis today announced that they will ditch dynamic pricing for the North American leg of the tour: