Matching Prices to Demand, in Real Time

Auto insurer Progressive uses a form of dynamic pricing, and an expert says more companies should be aggressive in adjusting prices

Can an ice cream shop charge more for a cone on a hot day? Should a parking space get costlier as the garage fills up?

Boston Consulting Group senior adviser George Stalk believes businesses can—and should—charge according to demand. The idea builds on a longtime strategy most associated with the airline industry, called yield management, in which carriers shift prices as planes fill up. The consultant, who in the late 1980s coined the term "time-based competition," the notion that time is a strategic weapon, thinks far more companies could take similar steps to match prices to real-time customer demand. Such moves are especially critical following a year when oil and commodities prices swung wildly, he notes, and "companies couldn't change prices as fast as they needed to."

Stalk says existing technologies such as radio-frequency identification, GPS, and wireless networks could someday make what he calls dynamic pricing a reality. He points to Ohio auto insurer Progressive (PGR), which is expanding its MyRate program that offers discounts in return for demonstrably safe driving habits. Customers who opt in to the program can plug a device into their cars' diagnostic ports, often situated beneath the steering wheel. The devices then wirelessly upload data to Progressive on how many miles customers travel, how fast they drive, and other factors. Progressive uses the information to offer policyholders discounts every six months for safe behavior and, in states where it's allowed by law, to tack on surcharges for risky driving.

Dynamic pricing, says Stalk, could eventually be much more real-time, with prices on store shelves automatically shifting up and down based on inventory levels, commodity costs, and consumer spending habits. How customers may respond to such constant fluctuations—and whether businesses will want to invest in such technology —are important questions. Stalk acknowledges that the model best fits companies such as travel operators or movie theaters, where scarcity can be a factor. But others, he says, could see the payoff of making pricing reflect "the economics of the moment."

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