Why Surge Pricing May Soon Be Everywhere

By Karthik V J, 
Senior Manager – CEO’s Office
SunTec Business Solutions          

The News

Recently, The Financial Times carried an article on the increase in the price of beer served in the Coach House, a pub in Central London. The Coach House had implemented ‘surge’ pricing because of which, a pint of beer was going to cost an additional cost of 20 pence on busy evenings and weekends.

It kicked up a storm as customers were upset about having to pay more for Britain’s favorite drink. While it was for just a pint of beer, can we expect surge pricing to grow beyond travel and hospitality, and enter new realms?

The Insight

The Coach House is no ordinary pub. It is one of the most popular pubs in the busy Central London area. The food is not extraordinary, but it is popular for the stand-up comedy performances on Mondays. And they are run by Stonegate, Britain’s largest pub company, which means that the owners have a sizeable market share, and understand what customers want.

The average price of a pint of beer in London has increased to nearly £5, and a significant part of this increase has taken place over the last year. This has been driven by a rising raw materials cost and exacerbated by inflationary pressures. Times are tough for UK’s pub owners. Fewer people are drinking beer in the UK, and inflation is eating into all the profits that were present a year ago. Pub owners now have no choice but to find innovative ways to make money and generate profits.

This is why the Coach House decided to implement a ‘surge’ for its beer on weekends and evenings. It made business sense – you charge more when there is more demand. And I am sure this will become a norm in the future.

Let Us See Why!

This is Economics 101. It teaches us that every price is based on an interaction between the supply side and the demand side. Now, even with the advent of home delivery apps, drinking beer in a pub, while watching a game of football along with friends, is a preferred way to spend time in the UK. And with the skyrocketing real estate prices, the chances of new pubs coming up are next to zero. This means that the supply of good quality pubs and the number of seats they offer are limited. On the other hand, the number of pub goers is growing. With a greater ability to spend, and a higher willingness to pay, new-age customers comprising millennials and Gen-Z are thronging pubs. This increased demand vis-a-vis a stagnant supply has put significant pressure on existing establishments. And dynamic pricing is one way for them to deal with it. Surge pricing is after all, a kind of dynamic pricing and with this, the pubs can restore the balance between demand and supply. As more industries catch up to this concept, we can expect surge pricing to be more common as organizations wish to address the imbalance between demand and supply.

Another reason why organizations consider surge pricing is due to a price ceiling that most products have.  Over the last few years, the growing price of products has been a consistent customer concern. Consequently, organizations must think beyond the box to get more revenue from their customers.  Surge pricing can add incremental revenue to existing products without increasing prices, and it is also justified if done correctly.

The growing affinity towards hyper-personalization is also driving the growing popularity of surge pricing strategies. The price that you get may not be the right price for you. This is because you may or may not be willing and have the capacity to pay more. It important for organizations to set the right price. They don’t to leave money on the table, and they don’t want to overcharge and lose customers. Surge pricing, for the right customers, is certainly the right way to achieve this hyper-personalization.

Organizations can develop and deploy surge pricing strategies easily thanks to the rapid evolution of technology. Big data analysis, machine learning (ML), and artificial intelligence AI) have revolutionized pricing by giving organizations the ability to create the right price for the right customer at the right time in the right context.  Gone are the days when the pricing team had to sit in front of legacy systems uploading CSVs and wait for a wide range of prices. Today, ultra-cool pricing systems, powered by the cloud and enabled by edge computing, can prescribe prices at the click of a button. And all these at a fraction of the cost than a decade ago. This certainly has been a driving force in organizations adopting surge pricing.

But beyond all of this, there is a strong factor that makes the march towards surge pricing more inevitable.  Yes, Coca-Cola faced criticism when it implemented surge pricing on its vending machines a few decades ago, and Uber has consistently messed up surge pricing in hostage situations and snowstorms. But customers have now grown accustomed to surge pricing. Even though travel companies faced the ire of the middle-class traveler in their dynamic pricing policies when travel expanded beyond the realms of the affluent traveler, the concept of surge pricing has become more commonplace. Organizations are making efforts to explain the ‘why’ of surge prices at certain times, and these explanations are striking a chord with the customers. The concept of fairness has also undergone a change.   Today people are increasingly willing to accept surge prices as a part of their life and as part of an organization’s efforts to strike a balance between revenue and customer delight. They don’t see it as another name for price gouging. To cite an example, a recent survey indicated that most Americans are not against surge pricing for events like concerts as long as the extra money goes to the artists themselves.

All of this means that surge pricing will become more commonplace in the years to come. Perhaps, your electricity prices will vary every hour with a surge during the peak times. The price of milk will vary every week based on the weather. That was the way it was before John Wanamaker, the Quaker merchant, introduced the price tags to promote equality and reduce negotiations. And that will be the way in a world that will be dominated by data and the concept of personal value.

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