20 Sept 2016
As the tough-guy boss of American Airlines in the 1980s, Robert Crandall knew the price of everything — and the value of it, too. In an era of corporate profligacy — and of a certain expectation among passengers — he identified opportunities to save money unseen by his rivals. Most famously, in a cutback that became the stuff of Wall Street legend, he removed a single olive from each in-flight salad. Passengers didn’t notice; the airline saved $40,000 a year.
But it was Crandall’s approach to tickets — not olives — that would leave the biggest mark on his industry, and many others. In the same decade, against fierce competition from low-cost carriers, which had mushroomed after deregulation of US airlines in 1978, he tried something new. By using increasingly powerful computer systems to monitor demand for tickets, and the prices set by rivals, American began constantly to adjust the price of every seat. In three years, yield management, or dynamic pricing, boosted revenues by more than a billion dollars. That’s a lot of salad.
Dynamic pricing started to spread slowly, and only in the few industries with the biggest computers. Hotel chains and car rental companies began treating rooms and Renaults like plane seats. Travellers began to accept that the guy across the aisle — or the corridor — might have paid significantly less for the same product. But consumers more broadly expected price to be static, or at least predictable.
For thousands of years we bartered but then, as we minted and printed money, goods needed prices. Even then they remained relatively fluid. Haggling was the norm in our bazaars before markets became super, and sticky little labels dictated terms. The concept of price became fixed in our minds. Sure we flocked to a sale or a discount, but unless there was a good reason — the rising cost of crude oil, for example, and its effects at the pumps — we didn’t like it when a computer asked us to pay more.
Premature adopters have learned this to their cost. In 1999, the soft drinks industry was profiting from a vending machine boom. While competition was driving down margins in supermarkets, consumers were prepared to pay full price at the machines. But when Coca-Cola began testing devices equipped with thermometers, which could increase prices during hot weather and high demand, customers revolted and the trial fell flat. It was one thing to blur the price of an airline ticket, and charge more when demand fizzed, but a can of Coke? No way.
In the past few years, however, transformations in tech and digital innovation have allowed a dizzying range of industries in the new gig economy to make price fluid again. Even the smallest startups are using these new tools to gain a granular understanding of their markets, and the meaning and effects of price. As the game changes, consumers are showing signs of a new tolerance to change.
Uber has brought cold economics into the taxi, upending the concept of fixed fares to charge more for the same ride when demand is high. Sports teams, theatres and theme parks, including Disney, have applied dynamic models to tickets. In some places, highway tolls and congestion charges change to maximise revenue, and decrease traffic. Ski resorts, where lift pass price have always been static, have begun to change them according to demand. Blue skies and new snow on a holiday weekend? That’ll cost you a bit extra.
The flipside of price surges is lower costs when demand is lower, and it’s here that companies have begun to benefit as much as consumers, controlling revenues in a way that was impossible before. Adult passes to Indianapolis Zoo used to be fixed just shy of 17 dollars. In 2014, when the zoo wanted to manage traffic around a new orangutan enclosure, it begun adjusting prices, day by day, between eight and 30 dollars. In the first year, admission revenue not only went up by 12 per cent but weekday visits, when prices were lower than at weekends, went from 57 percent of the total to more than two-thirds.
Online retailers have chipped away at price expectations for physical objects. Now stores are starting to go dynamic without the kind of backlash that greeted the Coke experiment. Kohl’s, Sears and Home Depot have introduced electronic price tags to shelves, allowing retailers to adjust prices and put on discounts in instant response to shifting demands and the online marketplace. Bars are beginning to turn the happy hour concept into something smart, adjusting the price of drinks throughout the night.
Robert Crandall, perhaps the grandfather of dynamic pricing, is now long since retired and into his ninth decade. But he has kept a close eye on the innovations that have taken off in the decades since he shook the airline industry with olive cuts and yield management. “I’ve always been pleased that we were pathfinders,” he told the LA Times in March. “Because dynamic pricing is now becoming very widespread.”