Pricing Marketing Guides
Pricing Strategy
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John Spacey, September 02, 2016 updated on January 14, 2023
Algorithmic pricing is the use of automation to set prices dynamically based on factors such as customer behavior. It has been a common practice in the airline industry since the early 1990s where it is known as yield management. Algorithmic pricing is common in highly competitive industries such as travel and ecommerce.Pricing algorithms may be extremely complex or relatively simple. In many cases, they may be self-learning or may be continually optimized by a/b testing.
ExampleAs an example of algorithmic pricing, different customers may be shown different prices based on their recent behavior or user profile. The same customer may also get different prices based on actions such as visiting the same page twice. RisksAlgorithmic pricing may be unpopular with customers as people tend to value stability and fairness. Price changes based on everything a customer clicks tends to result in a schizophrenic customer experience. As such, brands that ambitiously optimize metrics such as conversion rate using pricing algorithms may miss big picture issues related to reputation, experience and loyalty.Aggressive price changes may also attract regulatory attention as an unfair business practice depending on the factors that are used in pricing. For example, changing the price could potentially be viewed as false advertising.
Pricing
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