What is “Demand Pricing” and How Does it Affect Me?
There is what called a “check and balance” system in economics, and it is called supply and demand.
For may products and services, supply and demand is used in determining prices for products and services.
It sounds and seems simple on the surface, however it can get more complicated.
One of the best ways to explain supply and demand is in the housing/property market.
If there are more buyers of properties than sellers of properties, it is said to be a seller’s market, and prices can go up. Sellers can ask for more, and buyers will pay it.
If there are more properties bing sold, more sellers, than buyers looking to buy, property prices tend to be reduced as there is less demand.
The economic theory of supply and demand, and the business model of demand pricing, have been around and in use for a long time, however, recently we are seeing the demand pricing model being used in areas we had not thought of or expected before.
Demand pricing is defined as “a pricing method based on the customer’s demand and the perceived value of the product. In this method the customer’s responsiveness to purchase the product at different prices is compared and then an acceptable price is set.”
Taxi Services and Demand Pricing
One of the larger if not the largest taxi service now in the world is Uber.
Their business model, which has been questioned and in some instances has cost them their licence to operate in some cities is simple, you download their mobile application, and when you need a taxi you use the app to hail one.
The app not only tells you what vehicle your taxi is, but in some instances the drivers name, and you can track their location to pick you up.
You are told the fare, and no cash exchanges hands, the taxi fare is debited from your bank account all as a part of the application.
Sounds simple and convenient.
However, Uber and some other taxi services in using demand pricing are being accused of exploiting customers at peak times.
When there is a surge or huge demand for taxis, their prices go up accordingly.
If you are going to a match, and there are a few thousand people attempting to get from a train station to the stadium, a £5 taxi fare may rise to £10, or in some instances much higher.
The Airline Industry
No where do we see demand pricing more than in the airline industry.
The airline industry is faced with not only competition, high fuel prices, and airport taxes and flying slots at airports, but also the fact if their planes are no always in the air with butts in seats, they will not survive.
Tickets for airfares are priced in two ways:
* The earlier you buy your ticket you are supposed to save money
* The closer to travel time you buy your ticket, prices are usually higher
* Demand pricing is in place as if there is a huge demand for tickets, pries will rise
Unfortunately this demand pricing model is being used for what deem an exploitive manner since the recent collapse of Thomas Cook.
When Thomas Cook ceased to be in business, all their planes and flights stopped, which left tens of thousands of British holiday makers stuck abroad or across the globe.
The government and CAA/Civil Aviation Authority are in the process of repatriating those abroad, and in time, all will be back home.
The issue for some people looking to book their holidays now, or had holidays booked with Thomas Cook and now need to book them elsewhere, is causing a surge of demand on other airlines; who using demand pricing are charging much more for tickets.
An Analyst at JLS Consulting, John Strickland stated, “People aren’t sitting there rubbing their hands with glee. If sales come in rapidly on popular routes then prices go up.”
“Thomas Cook has failed because it had massive debts and it was making a loss. It’s a fragile industry. More than a dozen airlines have gone bust.”
“If the airlines don’t make profits where they can on a minority of flights then they don’t stand a chance of surviving.”
The airlines are capitalising on the loss of Thomas Cook.
We can also see demand pricing used in the hotel industry.
Different customers book rooms ate different times, for different prices.
As demand is high, so are the prices.
You can see this particularly at resort areas that are busy during specific seasons. Their prices are higher during peak seasons and lower other times in the year.
Demand pricing helps to explain why airfares, and holiday packages cost more when the schools are on break and the kids and families can all go together on holiday. There is a larger demand during these times of the year.