Dynamic pricing’ has caused a stir in Britain. What is it – and do we have it here?

They call it the “unhappy hour”: the time of day when the owner of Britain’s Slug and Lettuce chain of pubs puts up the price of beer. Not by much – an average of 38 cents on top of a typical $8 pint. But the recent innovation has been enough to cause ripples, not just among customers but around the world.

Slug’s owner, the Stonegate Group, labels the move – which affects 800 of its 4000-odd pubs, which include the Craft Union chain – a form of “dynamic pricing”, a triggered response to especially busy periods. And while it’s not new to quickly adjust prices according to demand, it is clearly quite a shock in watering holes, where punters have traditionally expected the price of a particular tipple to remain static throughout the evening. The feedback, on social media at least, has been excoriating.

Yet why not introduce dynamic pricing into pubs? In Australia, it is already commonplace across other industries, chiefly travel and accommodation, but also at Uber and Amazon. Meanwhile, some electricity retailers are exploring how the wholesale market, which sets the price of power every five minutes, could translate to real-time variable charging for households.

So, is it good for consumers or is it another way to take us for a ride? Is dynamic pricing fair? And will we see surge charging for beer in Australia any time soon?

What is dynamic pricing?

For much of human history, prices were typically settled by haggling between buyer and seller or among competing sellers in marketplaces. Even in early Victorian England, prices in shops were what we would call dynamic. “Goods were usually not priced,” writes Kelley Graham in Gone to the Shops: Shopping in Victorian England. “A customer asked ‘how much?’ and the shop assistant gave a price … it allowed the shopkeeper to raise prices for an especially prosperous-looking customer or to drop the price if the transaction faltered.”

There remains an element of dynamic pricing in your everyday market fruit stand, says Robert Shumsky, professor of operations management at the Tuck School of Business at Dartmouth in the US. “Bananas or avocados are perishable. So as they ripen, at peak ripeness the price will be highest and then we slash it before they go bad. That’s totally dynamic.”

The modern form, though, he says, has been driven by data and computer processing power. It came of age in the airline industry where it was first known as “yield management”, making sure planes were flying profitably by rapidly varying the cost of tickets according to demand – which was revolutionary back then. “All the airlines very quickly jumped into this method of pricing in the ’70s and early ’80s,” at least in the US, says Shumsky. “They had deregulated so it was kind of a Wild West situation where anyone could do anything.”

As e-commerce grew, hotels and other accommodation providers followed suit, lowering prices to fill empty rooms off-peak while maximising their returns when bookings were stronger, say, ahead of school holidays. Uber introduced us to “surge” pricing, a variation of dynamic pricing that, in theory, is supposed to encourage more drivers on to the road in unusually busy periods, such as during bad weather.

In 1999, Coca-Cola experimented with a vending machine that would raise the price of a can of soft drink in hotter weather, apparently with a thermometer and a “computer chip”. (Underdog Pepsi naturally complained it was unfair, with a spokesperson claiming “machines that raise prices in hot weather exploit consumers who live in warm climates”.)

By 2012, as The Wall Street Journal reported, dynamic pricing had spread to online retailers of practically anything, “deploying a new generation of algorithms (and) changing the price of products from toilet paper to bicycles on an hour-by-hour and sometimes minute-by-minute basis”.

Today, using machine learning and artificial intelligence, Amazon can reportedly adjust the prices of millions of everyday items based on consumer behaviour, overall demand for particular products and the level of competition among individual retailers trying to marginally undercut one another to win business.

Other forms of pricing can look similar, such as happy hours and weekend rates, say, at your local golf course. But these are not necessarily dynamic, says Shumsky, because they are pre-announced, regular and repeatable – “so customers can plan around them and understand why they’re happening”.

Why is dynamic pricing sometimes controversial?

It’s about trust, says Shumsky. While we have grown to accept, even embrace, dynamic pricing in some contexts – especially if we feel we’re snagging a bargain – we don’t want to feel held to ransom. So, shopping online for a new television: fine. We know the price of petrol floats up and down: less fine, but we accept that it happens. Discovering that your local pub is suddenly charging more while you’re standing at the bar: not fine, since you’ve already committed to being there.

Certainty plays a role too, says Dr Meg Elkins, a behavioural economist at RMIT. “Humans, to some extent, like uncertainty in their lives because it creates a level of anticipation, but I don’t think that is the same for prices. Prices tend to give us a lot of fear and anxiety, particularly when they’re going up.” She also notes that many of us engage in “mental accounting”, allocating a certain proportion of our funds to certain purchases. We might be comfortable, she says, paying $8 for a pint of beer but if it’s suddenly $8.40, even that slight increase could trigger us to feel we’re spending too much, breaching our mental threshold.

At a pub in Melbourne’s inner north on a Tuesday afternoon, patron David Fairless says if a surge in price caught him by surprise he would want to understand why. But he also doesn’t want to think too much about the price of a schooner. “I’m here to have a good time, I’ve allocated this time to come and do this.”

In Britain, the various Slug and Lettuce venues explained to customers through a “polite notice” that the temporary price increases would pay for extra staff, the use of plastic pint glasses and the need to “satisfy and comply with licensing requirements”. The Stonegate Group has said the timing of surges varies by pub but usually occurs on weekends and evenings. In a statement, the group said: “Like all retail businesses, we regularly review pricing to manage costs but also to ensure we offer great value for money to our guests. This flexibility may mean that on occasions pricing may marginally increase in selective pubs and bars due to the increased cost demands on the business with additional staffing or licensing requirements such as additional door team members.”

In Shumsky’s view, the move amounts to a betrayal of the pub chain’s regulars. “You’re going there not just to spend your money, you’re going there to be with your buddies, and to suddenly have to pay more is very different.” What the market will endure in the moment is one thing, he says, “but when you have a long-term relationship with your customer, you have to be much more careful about these things”.

Critically, says Martin Spann, dean of the LMU Munich School of Management, “It is easier to communicate a discount than a price increase. But consumer acceptance can evolve over time.” Still, he adds, “Consumers form reference prices based on past price experiences, and compare these reference prices to the current price. Reactions to price increases are, unsurprisingly, negative.”

Uber explains its surge prices as “a relief valve for the ride-share marketplace” when there are more customers than available drivers. Without it, “riders would wait longer (or might not be able to get a ride at all),” the company says on its website. Its algorithm updates in real time and is based on supply and demand but also forecasts market conditions.

Surge events have occasionally gone wrong, such as when Sydney riders were initially slugged four times the usual rate during the Lindt Cafe siege in 2014 (Uber later provided free rides from the city and asked affected people to contact the company for a refund). Uber can now send safety messages to drivers and riders; and it can put in place caps when it predicts demand, such as ahead of the Women’s World Cup semi-final in Sydney in August.

Could surge pricing for beer ever take off in Australia?

In the early 2000s, at the top end of Melbourne’s Collins Street, a bar offered drinks at fluctuating prices according to popularity. The concept was a gimmick – punters were made to feel like “traders” influencing drink prices on a makeshift stock exchange. The bar is now closed and local pub owners and industry watchers in Australia aren’t convinced there is any broader application, at least for now.

“I’m probably missing something; but I can’t see the fairness,” says Paul O’Bree, publican of the Standard Hotel in Melbourne’s Fitzroy. “At the end of the day, a pub is just a small business, built on consistency and respect, and historical relationships between pub-goers and pubs – that’s the important part. It’s not where the publican turns it into a quasi sharemarket.”

Indeed, implied notions of fairness and loyalty can limit the application of dynamic pricing, says Paul Crosby, senior lecturer at Macquarie Business School. “People still need to feel like they’re being treated fairly, and they need to be getting a deal that they think is worth it. They don’t want to be treated like cogs in an algorithm.”

None of the major Australian venue owners we contacted, including the Endeavour Group and Sydney-based Merivale, have used surge pricing or have any plans to do so.

Dynamic pricing in pubs and bars during periods of low demand has been trialled, to an extent, in Australia through apps that alert people when a venue near them spontaneously drops its prices. But the offering generally doesn’t lure crowds to the pub, says Joonas Karppinen, co-founder of The Happiest Hour, an online guide to food and drink specials. “The real-time thing hasn’t worked because it requires you to be there in two hours and people have stuff to do.” However, he says it’s a different story with consistent deals at predictable times of the week. “You’re getting the same sort of result; it’s 30 or 40 per cent more affordable during the quiet times than at the busy times.”

It’s generally not illegal for businesses to set, raise and lower prices in Australia, according to the ACCC, including based on supply and demand. In the case of beer, brewing companies set a price for beer sold to pubs or bottle shops, but there’s generally no fluctuation in price if, for example, there’s plenty of demand during a busy hot summer. Twice a year, the price does go up because of a beer tax linked to inflation. (Australia has the world’s third-highest beer tax after Norway and Finland, says the Brewers Association of Australia, and the tax has increased more than 10 per cent in the past year.) Pubs then set their own prices, based on what they buy the beer for, what their expenses are and what people are willing to pay. “You can’t be too high or too low,” O’Bree says.

What’s the future of dynamic pricing?

“It will even­tu­ally be every­where,” Robert Cross, who cre­ated a com­pu­ter­ised dynamic pri­cing model for Delta Air Lines in the early 1980s, tells Britain’s Financial Times. Certainly, there are efforts underway to take it beyond e-commerce. Renewable energy supplier Flow Power is examining how households might be able to buy electricity in the same way that wholesalers do, where the price changes dynamically every five minutes. When the sun is shining, the wholesale price can even go negative; during peak periods in the middle of summer it can skyrocket from cents into dollars per kilowatt-hour.

The opportunity, says chief operating officer Byron Serjeantson, is for homes to run major appliances or charge their electric cars when power is cheap then go easy when prices spike. “During the day, particularly in Victoria, South Australia and Queensland, where there’s high solar production compared to demand, for customers to be able to access that, obviously they’re saving a lot of money, but also they’re really being more renewable as well by using energy at the right time of day.”

Another frontier in dynamic pricing: electronic shelf tags that can react to consumer behaviour and inventory levels (and perhaps even avocado ripeness). In the US, Walmart is among those rolling out digital tags that accurately reflect the variable price of the same item online. “The economics and human behaviour factor in pricing is incredibly interesting,” says Alasdair Hamilton, a founding partner of Australian company Remi AI, which provides artificial intelligence and machine learning capabilities to businesses here and abroad. “Building up intelligent live systems that are taking in a range of different data points around what the market’s doing and what the consumers are doing and then trying to find the best price point is incredibly complex and incredibly interesting.”

Read the original article on The Sydney Morning Herald Website.