You probably know what Melanie Frazier felt like when she recently tried to book a flight from Portland, Maine, to Atlanta.
She found a $257 fare — not a bad deal — but by the time she got around to booking the ticket online a few hours later, the price had risen to $441. Undeterred, she set up a fare alert through Google, and a week later, sure enough, the fare plunged to $246.
Frazier, a retired federal employee who lives in Portland, went through all the steps required to purchase the ticket. “But when I hit the purchase button, a screen came up that read, ‘FARE CHANGE — Looks like there’s high demand for this flight.’ ”
The new price: $402.
Dynamic pricing explained
Broadly speaking, Frazier experienced something called dynamic pricing. It’s where the fare or rate fluctuates, often from minute to minute, aided by sophisticated computer programs that predict demand. Chances are, it has happened to you, too.
In a perfectly fair world, a product costs the same no matter who you are or when you buy it. But the world of travel is far from perfect. Companies use dynamic pricing to maximize their profits, charging the most during times of peak demand and lowering rates when no one wants to travel. While the process seems wrong to consumers such as Frazier, industry insiders say that it’s not only necessary but fair.
As always, though, there are ways to game the system to ensure that you don’t overpay for your next trip.
The price spread in the travel industry can be dramatic. The difference between the highest and lowest average airfare during March, a traditional month for booking summer travel, was $189, while the spread between the highest and lowest average hotel rate was $196, according to Adobe Analytics.
If that range strikes you as strange, you’re not alone. Everyone knows airline prices fluctuate, says Marwan Batrouni, a senior director at Advito, a travel consulting firm. “On the hotel side, however, dynamic pricing is relatively new and becoming more prevalent,” he says. Rates used to be pretty stable, changing infrequently. “Now they fluctuate on a daily or even hourly basis,” he adds.
Is dynamic pricing fair to consumers?
But is dynamic pricing, at least as it now is practiced, fair?
Yes, says Peter Vlitas, Travel Leaders Group’s senior vice president of airline relations. His company has $21 billion in sales volume every year, including airline sales. So if anyone understands the ins and outs of ticket pricing, it’s Vlitas. The proof is in the prices.
“Right now, the American consumer is experiencing some of the least-expensive airfares ever, adjusting for inflation,” he says. “The airline benefits by offering a higher price point for the consumer who is willing to pay for it. The consumer who wants a lower price will choose certain flight times or book earlier.”
So why does dynamic pricing feel so wrong?
“When the fare they see today is not there tomorrow, the level of stress it creates in the purchase path leaves the practice less than desirable in the minds of consumers and booking agents alike,” admits Mike von Foerster, chief executive of RightRez, a firm specializing in travel technology and automation.
Dynamic pricing is great — sometimes
In other words, dynamic pricing is great for airline passengers and hotel guests when they win, but when they lose, the entire industry looks bad.
Helen Prochilo, who runs Promal Vacations, a full-service travel agency in Long Beach, N.Y., has learned to work around the system. When she includes a price quote, she now prominently mentions the date and warns that the rates could “change at any time” until booked and airfare is paid in full.
Still, her clients are often caught off guard by the price swings. Just recently, she found a flight for a client from New York to West Palm Beach, Fla. The client called back the next day to confirm.
“By then, the price had gone up $200,” she remembers. The traveler grudgingly agreed to the new price. “As I was with her on the phone booking the tickets, the price went up another $25.”
Even then, the customer booked the airline tickets. And, in a sense, that’s how dynamic pricing is supposed to work. The algorithms that predict demand correctly forecast that Prochilo’s client would buy the tickets at a higher price — and she did. But in another sense, the entire episode looks like a bait-and-switch exercise.
How are these prices set?
It’s only going to get worse, experts say. The programs that set these prices, often referred to as yield-management systems, are becoming more sophisticated. They can now use personal data about you to predict when you’re likely to buy and how much you’ll pay.
“Consumers should become resigned to the idea that we are increasingly being targeted for our individual consumption,” says David Pyke, a professor of operations in the University of San Diego School of Business. Companies are using smartphones and geo-targeting, or creating predictions based on your location, to squeeze more money from their customers.
And if you think airfares are absurd, wait until you see what’s next, he warns.
“If you just bought hot dogs, and it’s the Fourth of July, a retailer may determine it’s time to raise the price on hot dog buns,” he says.
The bottom line
To win this game, customers have to act counterintuitively. For example, instead of booking a hotel room for the Labor Day holiday, look to the week after that, when demand is lower. There’s technology you can leverage to your own benefit, such as Google Flights, which allows you to track prices. You can also use a site like Kayak or an app like Hopper to determine the best time to book. These systems aren’t perfect, but they’ll at least tell you which times and days to avoid.
Using apps and sites, and a good travel agent, can help you keep up with these computer programs that set prices. But in the end, the only way to beat the system may be to do what it doesn’t expect.