Will consumers punish brands that introduce dynamic pricing?
Feeling a price rise is unfair is one thing - but will consumers let it impact their behaviour? ZenithOptimedia's Richard Shotton uses new research to find out.
The Odeon has recently announced an innovative new pricing plan. They are charging an extra £1 to watch the latest blockbusters compared to their price for smaller or older films. They join a long line of brands who have introduced dynamic pricing, such as uber, or Coke, who once publicly raised the possibility of charging more on a hot day.
At first this seems quite uncontroversial - it's a simple case of supply and demand in action. However, consumers don't necessarily react to pricing changes in a reasoned manner. They are far more emotional than the rational caricature presumed by economists.
ZenithOptimedia surveyed 253 consumers to get their views on the fairness of the price rise. 82% of those questioned thought the proposed price increase was unfair. When we asked another group an open-ended question about how the price change made them feel the most common answers were "angry", "ripped off" and the more catch–all "bad".
Feeling a price rise is unfair is one thing but will consumers let it impact their behaviour? If they want to see the latest film will they let that sense of unfairness put them off?
There is a significant body of evidence from psychology which helps answer this question. It revolves around an experiment called the 'Ultimatum Game', which was invented by Werner Guth at the University of Cologne in the 1980s and developed further by Nobel Laureate Daniel Kahneman.
The game involves a pair of people kept apart in separate rooms. The first person, the proposer, is given a sum of money, say £10. The proposer then decides how they want to split the cash between the two of them. The other person, the receiver, is made a one-off offer - do they want to accept the offer or refuse? No other communications between the two are allowed. The twist is that if they refuse the offer neither party gets anything.
The results provide a cautionary tale for brands considering dynamic pricing. People do not behave in the rational manner classical economics predicts and accept low offers. Most receivers reject offers of less than 30%. Receivers are prepared to make an economic sacrifice in order to punish those who transgress their notions of fairness.
An experiment by Cameron from Princeton showed that this still holds true when the stakes are huge. She ran an experiment in Indonesia where the pot was worth $100. Most receivers still rejected offers of $30 from that pot even though it represented two weeks wages.
So what can brands learn? Firstly, that they may well be punished for even a minor price rise if people perceive the pricing as unfair. Coke certainly learned this the hard way when they received a huge amount of negative publicity after they dabbled with the idea of vending machines which charged more on a hot day.
Secondly, that consumers' perceptions of fairness are fluid. Dynamic pricing seems to become more acceptable over time as consumers get accustomed to it and begin thinking it's the "natural" state of the market.
When ZenithOptimedia surveyed consumers about EasyJet's long established pricing model only 56% thought charging more for late booking was unfair. It'll be interesting to see if Odeon can hold their nerve long enough for the pricing model to become accepted.
Richard Shotton is head of insight at ZenithOptimedia