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Demand-based pricing strategy: A matter of avoidance or appreciation

Nov 14. 2014
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By Maas Virajoti

Remember the economics class many of us were required to take in university? We may not remember much from it or apply it to our daily lives, but one particular theory we should all be able to recall is the law of supply and demand. This states that produ
In recent years, the world has begun to embrace this concept more than ever before as new products and services have embedded this theory in businesses. 
There is one particular business that has reignited this theory and put it to successful use. Let us examine how this specific business is now affecting other businesses around the world and how it is unavoidable that it will also take shape in Thailand.
This business is Uber. During the past few months, you may have read articles about the Uber taxi service. It started in San Francisco and now has taken the world by storm by offering a limousine-like service targeting consumers with a little more cash in their pockets than typical taxicab users. 
Since its launch, Uber has faced much criticism from other businesses, and bodies linked to businesses, offering a similar service, including taxi unions and independent taxi providers around the world. Strikes have been staged and lawmakers have tried to halt Uber’s movement. 
However, it boils down to a matter of demand. And consumer demand alone enables Uber to excel in another matter, pricing strategy. 
Uber reintroduced the world to the basic economic theory of dynamic pricing when demand and supply are at play, naming it “surge pricing”. A similar pricing model has long been used by airlines and hotels for high- and low-season travel, 
Forbes magazine has dubbed this phenomenon “Uberisation”, as Uber is the company that brought this demand-based thinking back into the mainstream. 
The surge-pricing model is quite simple, especially for a service-based category such as taxis. At a certain time of the day, or a special time of the month, there will be an increase in demand for taxis while the number of taxis available is limited. 
This will trigger an instant increase for the price of a ride when consumers book Uber. Paying a normal service fee with extra “surge charges” guarantees them a ride without competing with others who are also looking for a ride. 
The surge amount can go up very steeply if the demand at that time is high.
With a surge system in firm position, this pricing model is now “Uberising” other businesses in the United States.
For example, San Francisco car-park operator SFpark has started surge pricing. The cost of a parking space rises along with demand. 
After a test run, SFpark reported that it was a complete success and would continue. What is more, it said the practice meant the time spent finding a parking space was almost halved, resulting in a 30-per-cent drop in greenhouse-gas emissions in the downtown San Francisco area. 
Uber started operating in Thailand a few months back. And although its taxi supplies and users are still limited, it is gaining popularity. 
However, is also a given that many Thais will think dynamic pricing unfair and full of extra charges. Many of us may even look for ways to avoid it. 
However, instead of avoiding this type of pricing strategy, let us imagine how this instant-demand thinking could affect Thai consumers and businesses.
If you are operating in the medical sector, doctors and other professionals could base charges more on how many patients want immediate consultation. 
If you are working in communications, extra speed could be offered to those who really need to use it in a time of congested telecom networks. 
These are just a few examples. But if local businesses put consumer demand to good use, many more demand-based pricing models can definitely be invented to serve the masses better and yield more profit. 
Sure, it will take some time for Thais to adapt, but if it benefits all involved parties, then why not use it? Since it seems unavoidable now, we all should take it for granted and find ways to prosper from it.
Maas Virajoti is group head, strategy and innovation, for IPG Mediabrands Thailand.

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