‘Dynamic pricing’ spreads beyond airline flights

Steve Henn Nov 20, 2011

Tess Vigeland: Happy Thanksgiving weekend, everyone. Hope your travels went smoothly — especially because in all likelihood you paid through the nose for those airline tickets. Anyone who’s booked airfare knows the system is rigged against you. The airlines have computer algorithms that make it nearly impossible for you to pay the same as the guy next to you on the airplane. It’s called dynamic pricing and we’ve covered it here before. But here’s the bad news as you enter this holiday season: Other industries are starting to use the same method to price their products.

Here’s Marketplace’s Steve Henn.

Steve Henn: By now, most airline passengers know that airlines change their prices constantly to try and squeeze as much money from travelers as possible. It’s why you may have paid twice as much for your seat as the guy sitting next to you. This process is called “dynamic pricing” and a few industries have been using it for years. But now…

Andy Boyd: Oh, it’s a hugely expanding field.

Andy Boyd is a dynamic-pricing pioneer. He and wrote some of the earliest computer algorithms for airlines to change prices online automatically.

Bob Phillips is another pioneer. He says as more of the economy moves online, this practice is spreading.

Bob Phillips: Hotels, rental cars, freight…

Boyd: Ticket sales for concerts and for baseball games…

Phillips: Automotive, retail, consumer package goods, cruise lines…

Phillips says when its done right, dynamic pricing can boost profits at all sorts of businesses, like banks. Phillips, who’s also a professor at Columbia University, has created a formula that mixes a consumer’s credit score with a his or her likelihood to shop around. Banks use that combo score to know whether to offer that consumer a competitive interest rate or a high one.

So what does this mean to banks’ bottom line?

Phillips: No, I can’t give you a ball park. Let’s say it can increase operating profit on the order of 7-12 percent.

And that’s money coming out of consumers’ pockets.

Keep that in mind while I bring in Oren Etzioni, a computer science professor at the University of Washington. Etzioni was flying to his brother’s wedding a decade ago when he asked the traveler sitting next to him how much he paid for his ticket. Turned out that guy got a much better deal than Etzioni did.

Oren Etzioni: And I was actually somewhat incensed. I said, Wait a minute, why should that be? And I started thinking about can we use computer methods — algorithms — to figure out when is the right time to buy your ticket?

In other words, beat the dynamic pricing geniuses at their own game. Etzioni started collecting online price data from all the airlines — then he created his own formula that could predict when the airlines would raise or lower their prices. His company was bought by Microsoft. And today, when you search for flights on Microsoft’s Bing search engine, you’ll see an arrow letting you know you if the price of that ticket is likely to head up or down.

Now Etzioni wants to do it again. He and his partner Mike Fridgen have launched Decide.com.

Mike Fridgen: So our tagline is “no regrets.”

This time, they’re predicting the prices of electronics — phones, cameras laptops and flat-screen TVs. When Mike came by my office, my wife and I were debating whether or not to buy a new television.

Fridgen: Fantastic. Let’s check ’em out. We’re going to help you decide if you should buy or wait.

When we logged on to Decide.com, it showed me the lowest price available for the TV we were looking at — anywhere in the country. It showed me a price history for the product and when the next model would come out. Decide recommended we buy it — and we did.

But what makes this site different is that it offers its best guess at whether the prices of those TVs are going to go up or down. Prices for electronics tend to bounce around.

Fridgen: You can see drops of $100-200 over the course of a couple of days.

Sometime though, computerized pricing goes haywire. Earlier this year, two computer pricing algorithms ran amok on Amazon. The algorithms eventually set the price of a classic textbook on fruit flies at more than $24 million.

In Silicon Valley, I’m Steve Henn for Marketplace Money.

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