Pragmatic Pricing

It is amazing how people are instantly skeptical of companies, especially when they change pricing strategies.  The thinking probably goes something like “the only reason a company would change pricing strategy would be to get higher prices from their customers.”

This may be true most of the time, so maybe our skepticism is justified.  However, sometimes a new pricing strategy comes along that helps customers.  For example, Ticketmaster has been in the news lately for announcing they will be using Dynamic Pricing.  The idea is the price of tickets will be closer to what the customer is willing to pay.  The attractiveness of the concert or sporting event will drive the pricing.

The skeptics have come out.  The Washington Post opens their blurb with:  “Tickets to concerts might be getting more expensive. But don’t worry, that money won’t be going to scalpers – it will be going to Ticketmaster!”

Let’s look at this from the perspective of three different customers.

The first customer is the one who is willing to pay any amount to see an event.  They currently pay whatever scalpers charge, which is the market price for the ticket.  In the current system the producer of the event gets the face value of the ticket, Ticketmaster gets a fee, and the scalper gets the sometimes very large mark-up.  After dynamic pricing is implemented, the event producer will get the much larger face value, and ticketmaster probably gets a higher fee.  The losers are the scalpers who are cut out of the transaction.  The winner is the event.  It seems right that the performers get more when customers pay more.  The customer also wins since they eliminate the uncertainty involved with purchasing scalped tickets.

The second customer is the one who would like to see the event, but wouldn’t pay the face value.  Dynamic pricing will help him because the prices on empty seats will continue to come down.  The price may drop low enough that he is willing to purchase the ticket.  In this case, the customer wins because he gets to see the show he otherwise wouldn’t, and the event wins because they sold a seat that would have gone empty.

The third customer is the only one who gets hurt.  There are customers out there who are willing to pay the face value of a ticket plus the time and energy to stand in line and buy a great ticket when it is first released.  That option will be taken away.  No longer can someone trade effort or connections to get good seats at great prices.  The unfortunate result is these are probably the biggest fans, the ones a touring band would like in the front rows.  Yet if that is the goal, we can certainly create other methods to achieve it.

It seems to me that Dynamic Pricing by Ticketmaster is a great thing.  It makes more tickets available to those who wouldn’t have normally attended and it puts the profit from the big spenders in the pockets of the event producers and artists.  Wow, a method for the company to make more money while helping out the little guy.

Hershey’s publicly announced a price increase of 9.7%.  Why would they do this? Not why would they raise price, but why would they announce it?

There are two logical reasons for announcing their price increase:

1.  They can blame it on someone else.  Their sugar costs are going up significantly so by announcing it they are able to blame the sugar prices for their price increases.  Customers are more willing to accept a price increase if the company is just covering increasing costs and not simply trying to increase profits.

2.  They are asking their competitors to follow.  It wasn’t explicit, but by taking the lead and announcing it, they are letting their competitors know that now is a good time to increase prices.  Hershey’s competitors are also facing rising sugar costs and they are probably wondering how they were going to increase prices anyway.  Hershey’s gave them the excuse.

If the competitors do not follow with price increases you can be sure that Hershey’s will bring their prices back down.  It is unlikely they will let competitors take their business based on price.

How do you see it?