Let’s chat about your last visit to the gas station (assuming you don’t own a “plug-n-play” vehicle). Chances are you hit the pumps in the last week or so. If you’re like me you drove in and drove out, mindlessly fueling to be on your way again as fast as possible. But lately I’ve learned there’s more than meets the eye as you fill-er-up. We’re all unknowingly playing the great retail chess game known as dynamic pricing.
Here’s the drill. My local Shell station asks me a lot of questions before I get my first drop of unleaded (which makes me crazy but what choice do I have?) Cash or credit? Rewards Program number? Zip Code? Car Wash? Paper Receipt? All that info is “pumped” out of me (ha) up front. Even then I must choose the octane before I finally get what I came for.
Now here’s the rub. Every one of those data points feeds a Watson-like computer somewhere far removed from the gas station. Watson brews a big customer-transaction stew, mixing in time-of-day, day-of-week, gallons purchased, and even weather conditions. The result? The “optimal” price point, delicately balanced between a) what you the consumer are willing to pay and b) what the supplier wants to net. It’s a price-per-gallon computation that changes as many as ten times a day.
Coca-Cola may get the credit for the advent of dynamic pricing – with soft-drink vending (almost 20 years ago now). Coke added a heat sensor and a computer chip to their machines, and as the outside temperature increased so did the cost of a soda. Bad taste, and bad decision. Consumers figured out the game and raised a big stink. The running joke at the time – maybe not so funny today – was Coke would next install a camera to determine how much change was in your pocket. Pepsi seized the opportunity to lure the unhappy customers and Coke quickly dropped the techno-gimmick. But dynamic pricing took hold and never looked back.
Dynamic pricing is easier to digest when it targets times or situations where customers don’t notice or don’t even care. The better example is school supplies. Towards the end of summer your local Wal*Mart or Target will deep-discount pencils and paper and the like, often as much as 50%. Kids will flock to the sale and load up on everything they need. Parents will give their receipts an approving smile. But guess what? The store still wins. That’s because “impulse purchases” bagged up with the school supplies are priced slightly higher than usual, more than offsetting any loss from the sale.
Dynamic pricing is hardest at work in hotels (what rate makes sense to fill that empty room?), utilities (do you really need the air conditioning right now?), and outdoor sporting events (are you willing to watch your baseball team during that unexpected rainstorm?). And of course, any time you shop Amazon or Uber, dynamic pricing is asking the question, “how much do you really want that product or ride?”
Let’s pull up to the pumps again. If you use “GasBuddy” or some other app designed to locate the lowest price-per-gallon, you’re winning the battle – but not the war. I wish I had GasBuddy the first time I filled up as a teenager. I crunched the numbers: forty years of driving; a tank of gas per week; eighteen gallons or so per tank. If I purchased at $0.03/gallon less each time I filled up, I’d have an extra $1,000 in my pocket by now.
Thanks to Watson and his endless algorithms however, GasBuddy isn’t much more than instant gratification. The suppliers are always one step ahead. Unless you keep an eye on prices (and a few gallons in your tank), you’ll inevitably purchase when your demand takes priority. Did you know gas is less expensive in the early hours of the day? That’s because commuters are more likely to fill up at the end of the day, when they unknowingly drive up demand. The computer is only too happy to adjust the price.
Maybe now you’ll leave the house a little earlier in the morning. Fill up on your way to work instead of on your way home later in the day. You will save a couple of cents per gallon if you do that. And good for you – you’re beating the dynamic-pricing game.
Just don’t buy a cup of coffee while you’re at it.