Dynamic pricing - definitely, or only maybe?

What the Oasis spat tells business leaders and politicians about pricing

Stand by for a lot of opinion columns this week about Oasis, ticket pricing and the perception of price-gouging by both established ticket sales sites and touts. Looking beyond the grabbing of easy headlines, though, there are important lessons to be learned from ‘ticket-gate’ both for those of us running consumer businesses and for those politicians who like to express a view on how businesses do business.

First the facts. Demand for Oasis tickets far exceeded supply, meaning many people who wanted to get them were unable to do so. Because the ticketing platform (Ticketmaster) was operating a ‘dynamic pricing system’, it is also the case that many people who did get tickets paid a lot more than the originally advertised base price for them.

The case for the prosecution, then, is that the whole experience was deeply misleading for consumers (who were told one set of prices when the original concert announcements were made and then charged much more) and represent unfair price-gouging on the part of either Oasis or Ticketmaster or both. This has ended up as national and international news.

What’s the case for the defence? Well, these tickets are a scarce commodity in huge demand and so obviously attract a high price. The dynamic pricing system being used is designed to be better than the traditional alternative, which is that tickets are sold at a fixed, lower price but then resold in huge volumes by touts in an un-transparent and unregulated way. If anything, goes the defence argument, the mistake being made was to set the initial baseline prices too low, though this was done in an attempt to make sure that ‘real’ diehard fans paid as low a price as possible. The simplest way of matching supply and demand would have been to just charge a huge price and sell to millionaires. By at least trying to sell at lower prices (and banning ticket resale for profit), surely the band and promotors have done a good thing?

The argument will run on, but are there lessons for your business in all of this? The Oasis story illustrates two equally important lessons about the pricing strategy that you should follow.

The first of these is the (presumably) obvious point that you should charge more for products which are scarce and/or in high demand and less for those which are not. The reason, though, that I put ‘presumably’ in there is that I’m often amazed by the extent to which businesses miss this basic bit of economics. Restaurants which charge the same price for a dish in different parts of the country with entirely different local markets and abilities to pay. Retailers who follow a more-or-less set pricing and markdown strategy through the year regardless of whether a product is selling fast or slow. Businesses of all shapes and sizes which are missing out on the huge opportunity that AI represents to dive into the detail of sales figures and generate optimal pricing strategies.

If you are reading this smug in the belief that your own business would never miss such a huge opportunity, ask yourself if you know what would happen, product by product and outlet by outlet, if you raised a price by 10% or lowered it by the same amount. If your view of how consumers would respond (what economists call Price Elasticity) is a guess or based on an experiment you did 5 years ago, you might just be missing a trick.

The second pricing strategy lesson to emerge from all of this comes from the consumer (and press) response, however. The reaction you experience from your consumers to a pricing strategy is also important in its own right. If your policy appears to be unfair, to penalise a disadvantaged group or to involve trickery and deceit, then it is quite likely that you will turn off customers in large numbers, even those otherwise prepared to pay.

There is, in my experience, a common-sense test that you can easily apply to your strategy - if you can explain it to an elderly relative or a teenager and they understand what you are doing and think it is reasonable then the wider consumer reaction is likely to be the same. If, on the other hand, they admire your devious trickery but think what you are doing is shameful, then again the wider public is likely to agree.

It is a delicate balance to get right, but my experience is that the general public are pretty sensible. They understand that in-demand products are likely to be more expensive and also expect that slow moving lines will be put on sale. Consumer journalists and other professional ‘watchers’ are often quick to write up a policy as outrageous but consumers are often more savvy and more forgiving.

In that sense, then, the fact that the Oasis ticketing saga has got so many people upset suggests that the dynamic pricing policies being applied have indeed gone too far, are perceived as unfair and, at the very least, need to be explained better.

If those are the lessons from all of this for us in business, what about the political classes?

This week’s coverage of the Oasis story has seen some commentary from politicians that ranges from the sensible (regulators should check that ticket platforms are working properly) to the inane (we should stop airlines charging more in school holidays).

It is an inescapable reality that prices are set by supply and demand - high demand and limited supply means that prices will be higher. A regulator, quango or government can interfere with that and choose what prices should be charged, but the outcome is rarely a positive one. Stopping a business from charging peak prices at peak times, for example, will either result in all their prices being higher or on them withdrawing capacity from the market altogether, making everyone worse off.

It has been fascinating to observe this week than this kind of ‘something must be done’ suggestion has come both from politicians on the left (perhaps driven by a well meaning but misguided wish to make everything better) and from those on the right (often driven by the desire for an easy headline).

Politicians of all flavours should be careful that whether driven by well-meaning interventionism or by headline-grabbing populism, they don’t put themselves on a course towards the kind of price-controls and state planning that are the very opposite of an economic growth engine.