Surge pricing is a new term for the old idea of setting prices based on market demand. What’s different today is that new technology enables those adjustments in real-time. Its impact on customer loyalty is the same as always, though. Here’s the scoop:
A foundational business tool
Pricing, which is the act of assigning a monetary value to a good or service in hopes of selling it, is as old a practice as it is complex. The challenge has always been to set prices accurately, which means balancing a producer’s cost of creating and delivering something (along with its profit requirements) with the willingness of customers to pay for it (the value of their real and perceived benefits). Such balancing acts are imperfect of any number of reasons: fluctuating supply and demand, the delays and/or imperfections in gathering and applying information on sales performance, the competitive landscape (i.e. alternatives to purchase or use), and the impact of market externalities on price, such as news or economic conditions, or even the weather. The important point to note is that nothing that’s sold has an inherent set value, nor is there a reliable mathematical equation to accurately set a price.
Utility for the Sharing Economy
Thanks to the Internet and the ubiquity of mobile devices as enablers of purchase, it is now possible to take real-time measures of many of the indicators that influence pricing. One of the key metrics, which is the availability of supply mapped against the immediate need, results in “surge pricing” increases when the former is static or declines, and the latter is static or rises. The approach to pricing is particularly evident in the way supply and demand are matched in services considered part of the Sharing Economy, such as a car or hotel offerings. Surge pricing is really a sped-up version of how pricing has always been determined (new clothing is always more expensive than older items because people want it). Its efficiency at establishing prices can be considered not only more accurate but also fair.
The counter-intuitive argument
But does surge pricing impact customer loyalty, let alone build it? There’s a counter-intuitive case to be made that it’s the exact opposite of what companies should do. Consider the music business, which has responded to the challenge of digital distribution by pricing new release singles higher than their catalog titles. Committed fans might willingly pay the surcharge, but does it push away potential new fans? It demands that they make a price/value decisions that they’re not only ill-equipped to make, but not wholly interested in having to do. Surge pricing erects similar barriers to entry in clothing. Now consider the alternative: When something is in demand, especially for the first time, it should be priced as low as possible in order to generate trial and prompt loyalty. A lower price allows customers to focus less on the financial cost (or any complicated value calculation), and focus instead on the experiential benefits. If loyalty matters, companies should consider pricing based less on the immediacies of demand surges, and more on the qualities of ongoing customer relationships. Could the financial benefit of frequent repeat customers’ patronage be greater than the margin gained on one surge event that otherwise left customers resenting the service (or worse)?
The alternative to surge pricing is subscription
A subscription is simply a regular payment (amount and time), and it has been traditionally used as the basis for payment on products or services that are somewhat regular (like print publications or web security programs). The merits of subscriptions are many, from the establishment of a forward-looking relationship to the automating of payments, which makes them easier to budget and, in many instances, consciously ignore. Many loyalty programs are de facto subscriptions, insomuch that users accrue benefits that grow through frequency/over time. So why not use it as an alternative to surge pricing? Imagine a rideshare customer who has X number of rides/month or some other period, which resulted in Y expenses, and then taking that ratio and proving him or her with a go-forward payment that would yield unlimited use for the next period. By “locking in” cost and usage patterns, companies could focus on providing great services, and customers could focus on appreciating them. Such a solution would be complicated to institute, and there would be people who’d “game” the system, but providing a reliable statement of value could shift business relationships from a reliance on price to the development of loyalty.
Surge pricing is unlikely to build customer loyalty; in many ways, it’s an additional expense, literally and figuratively, that could threaten perceptions of value, if not simply affection and/or regard for a brand. It’s possible that brands can overcome those losses, especially if they have near-monopoly control over the resources they’re pricing (an i.e. only game in town), but keeping customers by default is not the same thing as earning and keeping them via their loyalty. The jury is still out on how, and how much, surge pricing will impact long-term customer relationships.
Does Surge Pricing Build Customer Loyalty?