Tag: dynamic pricing

Guest Post: Electronic Shelf Labels, Dynamic Pricing and OM

Prof. Howard Weiss shares his insights with us monthly.

Disney, sports arenas, hotels and airlines have been using dynamic pricing (see Chapter 13) to increase revenue for years. Now it has come to supermarkets and is being implemented using Electronic Shelf Labels (ESLs).

ESLs allow retailers to use a computer or other electronic device to change the displayed price of an item rather than having to go to the shelf, remove the old price display and put up the new display. They have been widely used in Europe and now are being installed and experimented with in U.S stores including Kroger, Schnucks, Walmart and Whole Foods. But supermarkets are not the only stores that could benefit from digital pricing. Each Best Buy store devotes an estimated 40 labor hours per week to change price tags. With over 1,000 Best Buys, this could save 2 million labor hours per year.

While for Disney and airlines the major advantage is to increase revenue, for supermarkets the major advantage is operational. Rather than having employees go up and down aisles to manually change prices, the prices can be changed much more quickly from a console. In theory, the price of an item could change while you are shopping, although most changes are more prone to be weekly.

Some stores stock over 100,000 items (called stock keeping units, or SKUs), so having to change prices on even 10% of the items would take a great deal of time if done manually. The reduction in time with ESLs obviously leads to more efficiency and productivity. Another savings is on the cost of the printed price tags themselves. Digital price tags can include information in addition to the price itself. For example, it can show the current inventory level of the item or shoppers could use an app to easily find products in a store.

There are downsides to ESLs. They cost money and a store would need to purchase one ESL for each SKU. Also, an error in the listed price this could have repercussions at checkout lines. Another concern is how long the battery in an ESL will last. Still, within the next few years, millions of customers will be seeing digital pricing.

Classroom discussion questions:
1. List the items you would want for a financial analysis of implementing ESLs. Would breakeven be appropriate?
2. Have you been in any stores with digital pricing?

OM in the News: Disneyland’s Dynamic Pricing Model

Disney’s theme parks in the U.S. can fill to capacity during certain times of year.

After raising some ticket prices for its theme parks by more than 20% over the past 5 years, Walt Disney will set a new benchmark when it offers die-hard fans the chance to attend a 6-hour preview of a new attraction at Disneyland — for $299. Even for fans used to high prices, the sneak peek at Pixar Pier breaks new ground.

The steep price stems in part from a perennial tension Disney faces at its theme parks, where public demand is so strong, reports The Wall Street Journal (June 19, 2018). Raising prices — currently around $100 on average days and more than $120 during “peak” times around holidays — could mitigate tourist appetite and increase profits. The company, however, is wary of appearing to gouge customers. Disney is working on adopting a dynamic pricing model similar to airlines, in which prices fluctuate depending on when a ticket is purchased. Disney already has introduced a limited version of dynamic pricing to its parks, charging a range of prices based on 3 categories of dates: “value,” “regular” and “peak.” Prices range from $97 to $135 for Disneyland.

Under the new changes, a ticket to Disneyland for Christmas Day, for example, may cost less if purchased on July 1 than on Dec. 24. This would encourage visitors to commit to a day to visit the park farther in advance, which allows parks to plan better. Disney parks often reach their limit during the summer tourism season and over Christmas break, when the parks sometimes have to turn away would-be customers for several hours.

New attractions at the parks help Disney to handle crowds, but they also draw more visitors. Disney’s “Avatar”-themed experience has drawn crowds that can cause waiting times for some rides to average 1-2 hours—and in some cases, stretch to 4 hours.

Classroom discussion questions:
1. How does Disney’s use of yield management differ from that of airlines?

2. How does Disney deal with capacity issues (see the 6 points on page 313)?

 

 

OM in the News: Revenue Management and “Hello, Dolly!”

Thanks to what’s known as revenue management or dynamic pricing, in which costs shift constantly to match demand, top ticket prices for hit shows on Broadway have hit previously unheard-of levels. (Annual Broadway ticket sales reached a record $1.45 billion this season).

Last month the top box-office price for “Hello, Dolly!” was $748. For the phenomenon “Hamilton,” it was $849. Online this week the top price for a performance of “Hello, Dolly!” at several ticket resellers was $1,450. “People have been whipped into a frenzy by the top prices,” said the president of the Disney, producer of the current, dynamically priced hit musicals “The Lion King” and “Aladdin.”

As more transactions shift to the internet, consumers are getting used to a world in which dynamic pricing is increasingly the norm, writes The New York Times (June 9, 2017). We have pretty much accepted it for airline fares; airlines pioneered the concept of revenue management years ago. It has since spread to hotel rooms, sporting events, concerts and designer clothing — and is likely to be used for just about any highly differentiated product where demand may at times far exceed supply. The dynamic pricing algorithm, a software tool that draws on data for millions of past audience members, recommends prices for several different types of performances — peak dates like Christmas, off-peak dates like a weeknight in February, and periods in between.

“At the most basic level, all pricing is about allocating scarce resources,” said the head of optimization sciences at Uber. Surge pricing is another form of dynamic pricing. “I’ve worked in theater, concerts and sports,” he said, “and they all have a similar problem: For extreme hits, demand at what people would consider a reasonable price far exceeds supply.”

Classroom discussion questions:

  1. Why is revenue management a critical OM tool at airlines and hotels?
  2.  How does the Orlando Magic use dynamic pricing? (Review the video case in Chapter 13).

OM in the News: Yield Management Hits the Zoo

A ski resort in Michigan is among the businesses embracing dynamic pricing: Charging based on demand.
A ski resort in Michigan is among the businesses embracing dynamic pricing: Charging based on demand.

Adult passes to the Indianapolis Zoo used to cost $16.95. Now they set customers back $8 or $30—or almost anywhere in between. The zoo prices tickets like airfares, changing prices daily based on advance sales and expected demand. Since introducing such dynamic pricing last year, the zoo’s admission revenue has grown 12%.

Backed by vast amounts of data and powerful software, more businesses are varying prices by the day, the hour, or even the minute, writes The Wall Street Journal (Dec. 14, 2015). Frequent price changes are increasingly common in the physical world, amplifying the effects of supply and demand on everything from parking spots to golf course fees. A Dallas highway shifts toll prices every 5 minutes depending on traffic. Kohl’s uses electronic price tags in 1,200 stores to change prices for busy and slow times. More than 250 ski resorts in North America adjust the price of tickets daily.

Airlines pioneered more sophisticated dynamic pricing (called yield management) in the 1980s. Hotels and rental car firms followed in the 1990s. Coca-Cola tested raising its vending-machine prices on hot days in 1999 but retreated after customer backlash.

More recently, sports teams, bands and SeaWorld have begun adjusting prices based on demand. Uber and Lyft charge multiples higher from one moment to the next, based on the number of users looking for a ride and drivers on the road. Consumers typically resist dynamic pricing when it is introduced, but then quickly acclimate. Five years ago, Major League Baseball teams caught flak when they began changing ticket prices based on factors such as date, opponent, weather forecasts and seats remaining. Now pretty much every one of them is doing it routinely. Our video case study, Using Revenue Management to Set Orlando Magic Ticket Prices, provides a great in-class example.

Classroom discussion questions:

  1. What are the advantages and disadvantages of this approach?
  2. What is the impact of yield management to the Orlando Magic (see the Chapter 13 video)?

OM in the News: Yield Management Turns to Sports

We discuss the subject of yield (revenue) management in detail in Chapter 13, Aggregate Planning. Examples are provided from the airlines(American), hotels (Marriott), car rental companies (Hertz), and even Disney’s theme parks. But the latest issue of Operations Management/Management Science (OR/MS) Today (Oct., 2010) turns to an interesting and relatively new application of revenue management that may interest your students, namely, major league baseball.

Ticket prices to sporting events have always been priced to depend on the seat’s location. But the San Francisco Giants have discovered that  dynamic pricing of game tickets has increased 2010 revenues 6%. Ticket costs now depend on the opposing teams,  pitching match-ups, day of the week,  and even the weather forecast.

For example, a ticket in the Field Club, behind home plate,  for the Oct. 1st game between the San Diego Padres and the host Giants cost $68 at the start of the season. It went to $92 on Aug. 1st,$121 a week later, $145 on Sept. 4th, and $175  just before the game!

Discussion questions:

1. Are other sports and teams replicating this concept of dynamic pricing ?

2. Will there be fan pushback to the idea?

3. How did the 2010 pennant race impact on the Giant’s decision to use yield management?