Gemma Acton: What you need to know about surge pricing and why it’s here to stay

You might be reading this newspaper as you tuck into a morning coffee and pastry, or perhaps a sandwich over lunch.

In any case, you’ve undoubtedly paid less for your food and drink than many enjoying the hospitality at Flemington Racecourse during today’s Melbourne Cup. A five-course lunch plus morning and afternoon tea alongside standard alcoholic drinks (no champagne) in the Rose Room that overlooks the track’s winning post will set you back $1620.

A day before the race that stops the nation, some tickets to this indulgent session remained available. That suggests the pricing might have been a little aggressive — especially given many other hospitality packages for Melbourne Cup Day and indeed tickets for the same offer on Oaks Day two days later at a more reasonable $900 were long since sold out.

Setting prices used to involve a lot of guesswork but the more data that is available to retailers and service providers, the more they can finesse pricing to squeeze buyers to cough up every last dollar.

Done subtly, “dynamic” or “surge” pricing can be an effective route to higher sales and profits. Britain’s largest pub group, Stonegate, charges an extra 20 pence (38 cents) for a pint of beer at crowded times. Given how frantic it is to serve at a busy pub, the staff likely deserve the extra money (although it’s sadly unlikely to go to them) and given the improved ambience, it’s likely a surcharge worth paying for many clientele. Furthermore, after the sting of the extra fee and the mollifying dose of alcohol from the very first beer, many wouldn’t even notice.

When surge pricing is clumsily implemented, however, it can destroy trust and leave a very bitter taste. I had a frustrating experience trying to get an Uber from the airport one recent Sunday evening when the first one I booked offered a $45 fee to get home and a pick-up within four minutes. I raced to the pick-up spot, dragging a heavy suitcase and an eight-month-pregnant bump.

Arriving breathless and within three minutes, the driver cancelled when the pick-up time estimate had hit one minute. Over the next 10 minutes, four more drivers accepted and cancelled — with the proposed fee steadily increasing until the final offer was over $110. Which, for a ride that is usually sub-$50 seemed absurd. I retraced my steps and took a taxi home with no waiting time for $67.

The loss of my repeated future custom was surely not worth the extra $65 the company sought to make from me that night.

Last week McDonalds announced a 14 per cent jump in third-quarter sales. As customers of the world’s largest fast-food chain eat their same favourite items frequently enough to know the exact price of medium chips or a quarter pounder, surge pricing isn’t really an option. Instead, the franchises push through one-off price hikes from time to time. Sometimes they go a little far, prompting media stories quoting disgruntled members of chat groups, but by and large, given the chain has flourished since it was founded in 1940 and today has more than 40,000 outlets around the globe, it’s getting something right.

Some attribute its enduring popularity to its “something for everyone” pricing strategy. While it looks to sell as many of its lower-priced menu items to as many customers as possible, it also offers fancier and dearer items for the smaller subset of customers prepared to hand over more money.

When we dissect how Australian households are coping with the cost-of-living crisis as well as the recent — and likely continuing — barrage of interest rate hikes, the clear takeaway is that one size does not fit all. While younger renters and the parents of small children are feeling the pinch more than most demographic categories, some others in cash-rich brackets are making hay with savings rates finally delivering some returns after a bleak run. So retailers are aware of the need to cater widely and price accordingly.

Surge pricing is not new. The original masters of the technique are airlines. In the US that industry has been adjusting prices based on demand for the past four decades. The systems have grown increasingly sophisticated over that horizon, with websites and apps now analysing how frequently you return to check out airfares and therefore how likely you are to book a certain route on a certain date — and offer pricing accordingly.

Trade between people has likely been around as long as the human race itself — there are records of the first long-distance trade routes in action from as long ago as 3000 BC. And since then, I would assume that there was always scope for negotiation on a seller’s initial offer.

Sometimes, like in certain bazaars around the world, it’s almost rude not to bargain. Other times, for example in a vintage shop or if you’re buying in bulk, it’s worth a shot. But even when you’re up against a website, it’s worth remembering that few prices are set in stone.

It might be harder to barter with a computer but you should always be alert to how you can get a better offer by changing some of your search parameters. And as we enter the pre-Christmas sales season when retailers have a lot of stock to shift — remember, the worst they can say is no.

Gemma Acton is Seven Network finance editor.