Dynamic pricing and price discrimination are often used in the same sentence, and for good reasons. They both involve changing the prices of various products, so many consider the practices one in the same. While dynamic pricing is a form of price discrimination, it is not executed in the same fashion. As a matter of fact, both practices actually have very little overlap.
What is Price Discrimination?
Price discrimination is the practice of selling identical goods or services at different prices. It can often be classified in three degrees:
First degree: Using different prices to discover the maximum price you can charge for an item. Sending different prices in emails to consumers to see which ones garner the most attention is one way of doing this. This form of A/B testing can help you set your own demand curves.
Third degree: This is the most controversial type of price discrimination practiced by retailers. When practicing third-degree price discrimination, retailers alter prices according to market segments. For example, some retailers will charge more for online shoppers who are farther away from a brick and mortar location.
Most professionals mix up the third degree with dynamic pricing, but it is simply not true.
What is Dynamic Pricing?
Internal metrics: If a retailer is unhappy with their conversions or traffic on their site, a dynamic pricing strategy enables them to adjust the prices of their products until a certain rate is reached.
Market Factors: If the demand for a product has drastically increased, or their store has gained a lot of visibility, a dynamic pricing strategy can increase their prices to capitalize on the higher demand.
Competitors: A dynamic pricing strategy can be used to change prices to keep up with competitors. A retailer must be able to either match a competitor or stay above/below their prices by a certain percentage or dollar amount.
These changes affect their entire store for every customer that visits. It is not repriced according to market segments or type of customer that is visiting.
The Difference Between Dynamic Pricing and Price Discrimination
Price discrimination focuses on price changes based on individual shoppers’ demographics, whereas dynamic pricing changes prices with peak and off-peak demand and fluctuations in the competitive landscape. The only similarity between price discrimination and dynamic pricing is the ability to revamp prices based on customer data.
In many instances, price discrimination provides users with very different prices. For example, a retailer could keep track of the IP addresses of shoppers to determine if they are shopping with a Mac or a PC, and could offer a higher price to the Mac user (as they tend to spend more than PC users in general). Dynamic pricing does not take these kinds of metrics into consideration. Instead, it changes prices for all shoppers to stay competitive and capitalize on high demand opportunities.
Price discrimination is legal, but it needs to be practiced properly. Instead of pricing based on shoppers’ demographics, retailers should consider charging different prices based on market changes. It increases competition and could even benefit the shopper. Retailers need to walk a fine line between the two to make sure they are not slapped with an antitrust violation. Capitalizing on demand with a dynamic pricing strategy is the best way to stay ahead of the competition today.
Editor’s Note: This post was originally published in May 2015 and has since been updated and refreshed for readability and accuracy.