- Surge pricing is the practice of charging more for products in periods of high demand
- Over half of US consumers regard surge pricing in hospitality as equivalent to price gouging
- While it’s great for quick wins, it undermines consumer trust and brand loyalty
EVER booked a flight, only to find that a friend booked the exact same flight at a completely different price? It’s a common experience, and the reason behind it is surge pricing.
“Dynamic pricing models” are becoming ubiquitous across industries, and consumers aren’t happy about it. As coffee businesses take up surge-style pricing to benefit their bottom lines, it may also damage consumers’ trust and loyalty to brands.
Earlier this year, US-based chain Wendy’s sparked outrage from its introduction of fluctuating prices based on supply and demand. Although supposedly intended to offer lower prices, the swift criticism and accusations of price gouging forced Wendy’s to re-evaluate how new pricing models should be introduced to consumers.
Kroger, the US grocery giant, is currently under investigation for its digital price tags – the result of a partnership with AI company Intelligence Node and Microsoft – which uses potentially unethical methods like facial recognition to base surge pricing on sensitive consumer data.
Dynamic or “surge” pricing is no new concept. Airlines aren’t its only users – utilities like electricity and heating are often priced based on a combination of user demand and expected supply. The pricing model is now embedded in US operations, and more than half of retailers use it in Nordic countries, while around 40% use it in Germany, Austria and Switzerland.
However, the pricing model has really spiked in recent years and is being felt by more consumers. Most predominant are rideshare services like Uber, which have popularised surge (higher) pricing during periods of high demand, such as peak hour traffic and busy events.
In earlier years, it was deployed with varying success. In 1999, Coca-Cola tested vending machines whose prices would rise in tandem with temperatures – a pilot they swiftly abandoned when accused of exploitation. Regardless, it remains a popular exercise, with companies like Amazon reportedly changing their prices multiple times per day, perhaps even hourly or more.
Coffee is no stranger to the method, and against a background of inflation and rising cost of living, paying customers are starting to feel the pinch, calling such methods exploitative and unfair.
“Over the last twenty years or so, consumers have evolved significantly in terms of what they will pay for coffee,” says Dr Brent Smith, Professor of Marketing at Emerson College.
“Not only are more consumers more educated about the product, but they also respond more significantly to marketing and competitive differentiation. These factors can make ‘fairness’ difficult to pin down.”
Despite protests, surge pricing is stubbornly holding on. As companies embrace more technologies to track and monitor consumer behaviour, there are even more opportunities to capitalise on demand – taking consumer trust and brand loyalty to its limits.
Uber didn’t reinvent the wheel – surge pricing is as old as time
Examples of surge pricing from companies such as Coca-Cola, Amazon, and Uber make it clear that for the big players, it means real business.
“Success with dynamic pricing in retail significantly depends on company size, resource base, and market power,” says Brent.
“Whether that could translate to the coffee sector might depend on similar factors and whether coffee’s success depends on consumers having some up close, personal, and tactile engagement with the product.”
Although many credit Uber for the modern rise in surge pricing – with some even referencing it as “Uber-style pricing” – similar pricing models have been around for nearly as long as markets have existed.
Haggling and bartering, for example, draw on the same concept, adapting pricing to both context and consumer. However, under such models, consumers and businesses were at odds with each other, lacking consistency, trust and ongoing loyalty in their relationships.
The fixed price tag is a relatively modern invention, credited to the Quakers as a “good moral practice.” However, it also became a good business practice, as it provided consumers with the assurance that they would receive a consistent price for goods. Since then, fixed prices have helped increase brand loyalty worldwide, with the promise of consistent pricing encouraging return business.
But now, as many companies – including coffee businesses – embrace the benefits and quick wins of dynamic pricing models, brand loyalty and long-term business is at risk.
“Retailers that implement surge pricing should continuously research,” Brent says. “They should interrogate their assumptions about the market environment, consumers’ perceptions and positioning of price changes, and consumers’ tolerance for price changes relative to benefits.”
A recent survey of US consumers found that 52% of them regard dynamic and surge pricing in hospitality as equivalent to price gouging. Some companies have even tried to capitalise on consumer distaste for such pricing, with Burger King offering a promo for a free burger that it called “No Urge to Surge”.
As more brands aim to remain competitive and adopt “flexible” dynamic and surge pricing models to protect their bottom line, how will it damage consumers’ loyalty to their favourite brands?
Surge pricing is “a lose-lose game”
As large coffee retailers bank on surge pricing to protect their financial interests – with some even crediting their success to this model – it may have a ripple effect across the industry.
“There could be some movement of consumers against retail coffee shops, meaning they might trade down to a less expensive shop or simply opt out altogether and make their coffee at home,” says Brent.
“US markets have seen this recently. It really raises a question about coffee’s positioning as a product prepared at home or in a retail shop.”
Some claim that surge pricing makes the world “a less wasteful place” – illustrating the inefficiency of underpricing products and maximising revenue potential. In reality, surge pricing is arguably a lose-lose game in most consumer markets, and creates an information asymmetry that harms consumer trust.
The likes of Uber claim that it helps “to deal with increased demand.” But on the flip side, these models provide little transparency to those it affects most – drivers and riders – exploiting both for their own gain, in the name of appeasing demand.
Surge pricing is also indiscriminate in how it changes prices for consumers. Uber’s algorithms infamously implemented surge pricing during a hostage situation in Australia, and some family-orientated theme parks have introduced surge pricing during popular hours, targeting families during school holidays.
Brand loyalty and consumer satisfaction are undeniably important. But as surge pricing increases in popularity, brands may have to find other ways to maintain market share. Research shows that up to 88% of consumers say that it takes three or more purchases to build brand loyalty. However, 57% of Gen-Z US consumers are less loyal to brands than they were several years ago.
Brand loyalty is arguably everything for coffee brands – the purveyors of one of the world’s go-to sources of comfort. Although customers may occasionally experiment with other coffee brands, most love to return to the same and trusted favourites. Surge pricing and technology will inevitably get in the way of that.
“If consumers are adventurous, then the adventure should, at some point or in some ways, feel worthwhile – surge pricing, if executed without sound research and strategy, can waste and undermine consumer trust,” says Brent.
Surge pricing is popular for a reason – because it works, and pleases business owners and shareholders looking to maximise their bottom line. Ultimately, companies are trying to make money.
But historically, that depends on a more fickle kind of currency that is hard to earn: customer loyalty and trust. As consumers become increasingly aware of price changes, it might be a safe bet for companies to pay equal attention to return business in the long-term.
Coffee Intelligence
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