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The Psychology Behind Surge Pricing: How It Affects Consumer Behavior

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in
Krzysztof (Kris) Szyszkiewicz
Head of Delivery, Partner
November 23, 2023
pricing
price

Have you ever wondered about surge pricing and its impact on consumers? This method relies on the behavior of clients and time, and certainly raises prices when conditions favor it. It sounds like a fairy tale, but one wrong step can bring negative results, and instead of enjoying more profit, you may struggle to regain the trust of your audience.

That's why we're coming to your rescue. Read this article as we explore its advantages, disadvantages, tips, and examples from various industries. 

What is Surge Pricing?

The surge pricing model operates on the principle of time-based adjustments and automatically raises the prices of products or services when demand is high and supply is limited. 

Using this pricing mechanism usually results in higher  prices during:

  • peak periods,
  • adverse weather conditions,
  • or special events like New Year's Eve.

Surge approach is grounded in the economic concept of willingness to pay. It allows companies to flexibly adjust prices based on real-time market demand and supply levels. Often, it is executed using machine learning algorithms that analyze data, for example, rider demand and driver supply.

Example

Imagine you want to attend a highly anticipated concert featuring your favorite artist, but you haven't bought a ticket before. The prices were not high at first, but to your surprise, they are higher now. Why? 

Because a ticketing platform - aware of the expected interest in demand - employed a surge pricing strategy. As the concert date approaches, the ticket prices dynamically adjust based on factors like the artist's popularity, the venue's capacity, and the time remaining until the event.

So, the limited supply of tickets has been adjusted to meet increased demand. And since the appetite for tickets is so great, and customers are ready to spend so much, ticket sellers can manipulate the price as they see fit.

Benefits and Drawbacks of Surge Pricing Method

This form of dynamic pricing has become a widely adopted method in various industries. While it offers several advantages, the system is not without its drawbacks, with debates surrounding its fairness and potential for overpricing. 

We will briefly go over the pros and cons so you can see the full picture of this strategy.

⭐ Benefits

Optimized Earnings

Surge pricing allows companies to earn more during periods of high demand. It serves as a lucrative incentive, for example, for drivers to be available during peak times. This increased earning potential can be especially attractive for businesses looking to maximize their income in a short time. It can be a hit if you are certain that customers will indeed buy from you despite the price increase.

Balancing Supply and Demand

By adjusting prices based on real-time demand and supply data, surge pricing helps maintain a balance between the number of available services or product mix and increased demand. This equilibrium contributes to a more efficient allocation of resources and reduces the likelihood of customers experiencing prolonged wait times for a product or worse - they won't get it.

Enhanced Efficiency

Since the dynamic nature of surge pricing ensures that resources are allocated efficiently, companies can better meet customer expectations despite higher prices This not only benefits clients by providing faster access to desired products and services but also optimizes the utilization, manages inventory and employees, and leads to improved overall system efficiency.

Adaptable to Market Conditions

Surge pricing works really well with external factors such as bad weather conditions, holidays, major events, trends, or consumer behavior. This adaptability helps companies align their pricing structure with broader economic and social trends, and ensures a more responsive and consumer-centric approach.

Transparent Communication

But also this time-based pricing helps the company communicate transparently. Informing about upfront fare estimates provides customers with clear information about price adjustments. Here, transparent communication can maintain customer trust, help users make smart decisions, and reduce negative surprises.

👎🏽 Drawbacks

Price Gouging

While this pricing is designed to help optimize earnings, people argue that this may be perceived as a price overstatement. As it leads to significantly higher prices, it may result in deemed unfair or exploitative. Going further, it may cause negative publicity, regulatory scrutiny, and a tarnished brand image. All of this has long-term repercussions.

Dissatisfaction

Rapid and substantial price increases can boost customer dissatisfaction. This type of strategy can undermine the loyalty among users who may feel taken advantage of them when demand increases. This dissatisfaction may extend beyond a single purchase and stay with them for longer. Thereby it can affect customers' overall perception of the service and their willingness to continue using it in the future.

Uncertainty

This pricing introduces uncertainty about the final cost and makes it difficult for clients to plan and budget for their expenses. Unfortunately, it can lead to frustration and may deter some users from utilizing different services or buying some products during peak demand times.

Algorithmic Inaccuracy

Such pricing tactics rely on algorithms that may not always work accurately. For example, without a proportional increase in demand, prices can spike too. Thus, algorithmic inaccuracies can result in perceived unfairness - customers may question the justification for higher prices when the actual demand does not align with the pricing model's predictions.

Negative Public Perception

Always remember that using dynamic pricing like this one can generate negative publicity and create a public relations challenge for everyone who employs this pricing management. What is the result? Negative public perception may cause difficulties in attracting and retaining customers who are aware of how companies determine pricing.

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Tips on How To Use Surge Pricing

Now you see that implementing this strategy effectively requires a strategic approach to balance the interests of your business and customer satisfaction. 

Thus, here are some tips you can use to improve your pricing decisions.

Use AI and ML

They will help you better analyze and adjust to various factors influencing demand. Advanced algorithms enhance accuracy in predicting surge periods and prevent unexpected price hikes. Also, thanks to machine learning, your tools can learn based on past activities and better adapt to future demand increases.

Bet on gradual price adjustments

Implement small price changes rather than sudden spikes. Incremental changes allow customers to adapt to rising costs and reduce the chances of dissatisfaction and negative feedback.

Offer discounts

Offset the impact of surge pricing by offering promotions or discounts. This tactic is often used by companies that want to encourage users to buy when the demand is low and customers are not willing to pay so much.

Communicate your decisions

Keep customers informed about the factors that contribute to surge pricing, such as increased interest or limited availability. If clients understand the reasons behind price adjustments, they can accept your choices with greater willingness. Such transparency also helps manage expectations and reduces negative reactions.

Test different approaches

Regularly conduct tests to assess the functionality and customer response to surge pricing. You may test functionality and pricing and optimize them based on real-world feedback.

Create membership programs

Introduce programs that offer benefits such as price protection during surge times. This encourages customer loyalty and provides an incentive for users to subscribe to premium services.

Monitor the market

Implement market and customer sentiment monitoring. Adjust surge pricing strategies based on evolving circumstances and maintain different prices according to the demand.

Real Examples of Surge Dynamic Pricing

Now let's see some simple examples in three industries - rideshare services, entertainment, and e-commerce.

Ride-sharing services: Uber

Pioneers in the ride-sharing industry - companies like Uber and Lyft - employ dynamic pricing to adapt to fluctuating demand for rides.

Through the Uber app, the business automatically raises prices during the morning or evening, depending on real-time factors. Such setting the prices for a product guarantees that a firm can meet needs and make a profit. You can also order delivery with Uber Eats. Here too, prices for the service may vary depending on factors. With this fixed pricing, Uber drivers optimize the balance between supply and demand.

Entertainment: Ticketmaster

In the realm of entertainment, Ticketmaster also utilizes prices referred to as surge pricing to fulfill the need for concert tickets. 

The platform's pricing is widely influenced by various factors. For example, you shouldn't be surprised prices are surging during the initial release of tickets for a highly anticipated concert. Clients who still want to go to the gig will pay the premium price for access to it. In this way, Ticketmaster helps manage ticket availability and ensures a fair distribution.

E-commerce: Amazon

In the e-commerce sector, a notable example of surge dynamic pricing can be observed on platforms like Amazon, Allegro, eBay, etc. For instance, online retailers, during shopping seasons like Black Friday or when stock levels are limited, may implement surge pricing on certain goods and services - in this case - a business can also lower it dramatically. 

This practice is really simple - it encourages customers to make purchases at times when demand is high and resources are limited.

Become a Pricing Master with Valueships

Surge pricing can be tricky and challenging, but with Valueships by your side, you gain a strategic ally in the pricing landscape. 

Our expertise in pricing consulting, strategy consulting, and value-selling equips us to guide you through this pricing model. We can also analyze your company and tell you if this tactic is a good option for you.

Valueships has a proven track record of helping businesses optimize their pricing. Learn insights from our case studies here.

Our team works in many industries, including SaaS, Custom Software Development, E-commerce & Marketplace, Subscription & Digital aspirations, Private Equity & Venture Capital, and more. With a focus on data and modern pricing policies, we will make your business as effective as possible. 

Change Prices Based On Demand

Surge pricing automatically reflects changing market conditions. This is a very attractive option for companies that want to earn more but have no idea what strategies to adopt. However, be on guard - if you make inadequate price changes, you may alienate potential customers and do more harm than good.

If you feel unsure about pricing, contact Valueships. Take the proactive step to manage surge prices effectively and partner with Valueships for unparalleled pricing expertise.

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Krzysztof (Kris) Szyszkiewicz
Head of Delivery, Partner

Certified expert in price, revenue and margin management in B2B companies and e-commerce. Member of the prestigious Professional Pricing Society. At Valueships, he is responsible for the implementation of consulting projects and taking care of the profitability of clients. Prior to joining Valueships, he worked at McKinsey & Company in the area of ​​pricing and strategy.

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Krzysztof (Kris) Szyszkiewicz
Head of Delivery, Partner

Certified expert in price, revenue and margin management in B2B companies and e-commerce. Member of the prestigious Professional Pricing Society. At Valueships, he is responsible for the implementation of consulting projects and taking care of the profitability of clients. Prior to joining Valueships, he worked at McKinsey & Company in the area of ​​pricing and strategy.