As dynamic pricing, the practice of adjusting prices in real time in response to competitor pricing, supply and demand, time, and other factors, has become prevalent, a discussion of its fairness to consumers is more critical than ever. What are the ethics of dynamic pricing, and can anything be done to move towards a more ethical dynamic pricing strategy?
Here at Pricefx, as a leading cloud-native pricing software company with AI optimization among our offerings and customer satisfaction as a core value, we’d like to challenge ourselves to take part in that conversation.
In this article, we’ll explore some of the ethical considerations involved in dynamic pricing before offering a few steps businesses can take to support fair play when implementing their dynamic pricing strategies.
Before we begin, please note that ethics is a murky subject. This article represents the opinions of the author only and does not represent the views of Pricefx as a whole.
Ethical Considerations in Dynamic Pricing
Enabled by AI algorithms and unprecedented ease of access to a wealth of competitive and customer data, dynamic pricing has accelerated the rate of price adjustments and competition in the marketplace. In turn, the strategy has posed unique challenges to businesses, including the task of balancing their potential profitability with what’s fair to customers.
Ethical Concerns Around Dynamic Pricing
In this section, we’ll call out a few of the ethical concerns being discussed today around dynamic pricing, as well as briefly touch on the legal context in which the strategy lives.
Supply and demand management tool?
Enterprises employing dynamic pricing often claim to use the strategy to manage supply and demand; that is, at least, the case with Uber, the strategy’s perhaps most notable advocate.
On its website, Uber explains that their surge pricing is in place to incentivize its employees to get on the road when ride requests are high. However, a study by Northeastern University found that surge pricing doesn’t always result in more drivers showing up – in fact, they observed that drivers left surge areas to catch more riders.
Whether there’s validity to it or not, the study, and others like it, still raises questions on how dynamic pricing is used. Is it always a way to manage supply and demand, and when it falters in accomplishing that, to what extent is it a profitability shortcut at the expense of consumers?
Lack of accessibility to products and services
Using dynamic pricing to price above what’s competitive may not be considered appropriate when essential or life-sustaining goods and services are concerned. High market–sharecompanies using dynamic pricing, especially in unregulated markets, have the power to significantly limitconsumers’ options when making buying decisions, giving way to accessibility issues — particularly for low-income segments.
While dynamic pricing is beneficial to consumers when demand is low, as it pushes prices down, the strategy doesn’t bring the same benefits when reacting to unexpected levels of demand; at worst, it could lead to pricing certain consumers out of the market.
Lack of consideration of larger social context
Under a dynamic pricing model, while economically reasonable to trigger higher prices when demand is high, the context driving sharp hikes in demand holds significance from an ethical perspective, as price increases may not be considered a sensitive choice in all situations.
Here lies one unintended consequence of algorithm-based pricing. AI algorithms behave as they’re trained, and in the case of many dynamic pricing models, that largely means responding to supply and demand dynamics. When and where price surges are morally appropriate is an intricacy that needs to be somehow integrated in its learning period. For example, Uber now has a fare cap in its algorithm for states of emergency.
Consumers can find dynamic pricing to produce unfair pricing depending on the context; for example, a study of Booking.com found that consumers believed upfront pricing differences across dates or room types were less fair than price changes during the booking process.
While consumer perceptions of what’s fair under dynamic pricing is an important ethical consideration, determining the conditions that elicit more positive or negative reactions remains challenging.
Is Dynamic Pricing Legal?
The short answer is, it depends.
Various jurisdictions, including the European Union and the United States have some form of price discrimination law or regulation in place. However, these laws are complex, and dynamic pricing may be impacted by laws that are not specific to pricing. If you are considering a dynamic pricing strategy, we recommend doing independent research and/or consulting an expert to ensure you are not tripping up applicable laws or regulations.
Navigating the Ethics of Dynamic Pricing: Moving Towards Fair Implementation
The walk along dynamic pricing’s ethical “tightrope” is at times a difficult one, but there are a few simple practices businesses can implement today into their dynamic pricing strategy to help maintain the balance between profitability and fairness.
Handle sensitive data responsibly
While legislation feeding into dynamic pricing varies considerably, it’s clear that protecting sensitive data is a central concern globally. Price discrimination will generally lead to problems when based on identity categories, such as gender, race, religion, or sexual orientation.
So, when charging consumers different prices for the same product, companies should exercise common sense and consider whether the factors driving those prices up and down would be considered sensitive outside of a pricing environment.
Consider customer willingness to pay
Ethical dynamic pricing should consider what customers need. However, the discomfort many consumers feel when encountering price hikes can indicate there’s a mismatch between how much they’re willing to pay and the actual price.
Businesses can factor consumer preferences into their dynamic pricing strategy by training AI algorithms to both infer customer willingness to pay (based on historical buying behavior, online activity, and other factors) and uphold fair price discrimination.
Many consumers already know dynamic pricing exists, and they’ll continue to get used to it – but this doesn’t mean they know how it works. Consumer data collection methods (e.g., tracking browser cookies), used in part to present different prices to different consumer groups, venture into unethical territory when customers are unaware of the extent to which their personal information is being leveraged.
Companies can support more transparent pricing practices by allowing customers to understand, at least at a broader level, how they’re using their data to produce tailored pricing offers.
Focus on value, not just demand
Dynamic pricing, when done correctly, tries to hit on a specific goal: capturing value. Take Uber, for example; it recognizes that a rider’s need to secure a ride home after a concert surpasses that of someone walking home from school.
Companies can conduct independent research to understand how the value of a product or service changes in different circumstances, and then use dynamic pricing to reflect that value, rather than simply increasing prices in respond to higher demand.
Dive Into More Resources on Dynamic Pricing
Much of the trouble that comes with dynamic pricing is the price hikes no one sees coming. And when it comes to pricing, no consumer wants to feel blindsided – it erodes trust and alienates once-loyal (or potential) customers. Ultimately, companies can uphold fair pricing by aligning their prices as best they can with the value customers place on that product or service.
If this article has left you wanting to learn even more about dynamic pricing, you’re in luck! We have a comprehensive guide on the dynamic pricing strategy, including its pros and cons and best practices. Continue exploring below:
Jose Paez is a Solution Strategist at Pricefx with 14 years of experience as a pricing practitioner. In his career, he has led in every aspect of pricing from analysis and optimization to pricing strategy definition and execution. His experience in driving and implementing initiatives in digital transformation has given him insight into the typical roadblocks organizations face and the best paths to release the untapped potential of pricing organizations.