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How dynamic pricing is squeezing consumers

A man poses holding a smartphone showing the app for ride-sharing cab service Uber on Oct. 28, 2016.

Daniel Sorabji/AFP/Getty Images

Two couples walk into a car showroom—one a mature duo in designer clothing, the other a young pair with a baby on the way. It doesn't take a sales genius to figure out that you can squeeze more money out of the older buyers, based solely on their stage of life and what they're wearing.

That's called dynamic pricing, and retailers have taken it to a whole new level online. Say you're searching for a hotel room or the latest bestseller. Based on the vast amount of information e-tailers can glean from your IP address—where you live, your buying history, even what kind of device you're using—you could see a different price on your screen than the next customer.

The cost of goods and services has always gone up and down thanks to the simple rules of supply and demand. Airline tickets and Uber's surge pricing are familiar examples of how the two are intertwined. But dynamic pricing differs in one key way: Customers may simultaneously receive different prices, even though neither supply nor demand has budged.

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The reason boils down to digital's capacity to both track customer habits and demographics, and to serve up customized, quickly changing prices. It's supply and demand, sure, but in micro—not based just on broad market factors, but on targeted, individual ones. Are you a repeat customer? What other sites have you visited lately? How far do you live from the closest store, and is it snowing outside? The Wall Street Journal has reported that Mac users can pay $20 or $30 more to book a hotel online (the theory being that people who buy Apple products are wealthier and less inclined to scour the Web for discounts). A study from Northeastern University suggested retailers like Home Depot and Sears charge users more if they visit the website on an Android device rather than on a desktop. Meanwhile, if you're a frequent flier, you'll likely pay more per flight, since the assumption is that you're travelling for business and therefore expensing the ticket anyway.

The upside for retailers is clear: They can, in theory, squeeze additional profits out of customers in a slim-margin business. But those retailers also run the risk of alienating customers who value fairness above all. American investigative news outlet ProPublica recently outlined how Amazon uses dynamic pricing to guide shoppers to resellers that pay higher fees to Amazon. And buyers of simple household products often see prices that are 20% higher than usual—unless, of course, they subscribe to the company's $100-a-year Prime service.

Amazon ran afoul of competition laws in 2000 in the U.S. for similar practices. While dynamic pricing has yet to be tested against Canada's Competition Act, the more immediate worry is upsetting customers. Given how quickly both information and consumer outrage can spread online, discriminatory pricing could easily become a PR nightmare.

One possible solution is to tie dynamic pricing to both loyalty and targeted marketing—that is, to strategically move prices up and down for consumers who have chosen to receive direct messages from your company or who are connected to a broader, possibly for-pay loyalty program (à la  Amazon Prime). Because, after all, the ideal of dynamic pricing is not just to generate greater profits, but to keep your customers coming back. Everyone wants to feel like they're the savvy shopper getting the best deal—and that's ultimately what makes consumers most loyal.

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