Merlin Entertainments – the owner of Legoland and Alton Towers – is the latest high-profile brand to announce the introduction of a dynamic pricing model.
The parent company of the two theme parks, and many other popular attractions, stated that approximately 20 of its global venues will introduce the new pricing model in 2024.
The company has claimed the move will help “protect the guest experience” by ensuring that the “peak period experience is optimized by avoiding overcrowding.”
So, how exactly does dynamic pricing work?
While many companies (Merlin Entertainments included) currently utilize peak and off-peak pricing, which alters prices depending on seasonal fluctuations – dynamic pricing takes this a step further.
Powered by machine learning, dynamic pricing is more flexible and responds faster to events/issues – providing customers with up-to-date price discounts or increases.
This may mean that customers could pick up a last-minute bargain if a sunny summer weekend was unnaturally quiet, but it also works in reverse, meaning a mid-week winter afternoon could see a price surge if it started becoming busy.
Merlin Entertainments’ Chief Executive, Scott O’Neil, described the new pricing model as “very intuitive,” stating that:
If [an attraction] is in the U.K., it’s August peak holiday season, sunny and a Saturday, you would expect to pay more than if it was a rainy Tuesday in March.
But how do customers feel about the pricing model? And will it really deliver on the promise of an improved customer experience?
Dynamic or Surge – Does it Matter?
While customers have not yet had the opportunity to see how Merlin Entertainments’ new pricing structure will work in practice, there are examples of other businesses adopting similar models.
American fast-food chain Wendy’s also recently announced that it would be introducing dynamic pricing at its restaurants but was quickly forced to backtrack following an outcry from customers – with the company claiming that its plans had been “misconstrued”.
Chief amongst Wendy’s critics was US Senator Elizabeth Warren, who wrote the following post on X:
.@Wendys is planning to try out “surge pricing” — that means you could pay more for your lunch, even if the cost to Wendy’s stays exactly the same.
It’s price gouging plain and simple, and American families have had enough.https://t.co/dbJuhAM6vp
— Elizabeth Warren (@SenWarren) February 28, 2024
While Wendy’s was quick to refute the claim, stating categorically that it “will not implement surge pricing,” the fast-food business is still planning on using digital menu boards that could offer different options at different times of the day.
What’s the old saying about looking like a duck and walking like a duck?
Despite Wendy’s statement referencing “discounts” and “value offers”, the fact of the matter remains that customers will still be paying different prices at different times for the same product.
For Jon Picoult – Author and Founder & Principal of Watermark Consulting – this is the sticking point; as, regardless of whether it’s dynamic or surge pricing, it still contradicts what Picoult believes to be one of the key things that customers value: “consistency and predictability.”
Price is part of the customer experience. People routinely talk about customer experience as though it were separate and distinct from price.
“The fact is that price (and how prices are set) plays an influential role in shaping customer impressions. For example, a low-priced offering can make a customer feel thrifty and prudent – whereas a high-priced one can make them feel exclusive and elite.”
While there are clearly differences in price and frequency of use/visit between fast-food restaurants and theme parks, Picoult’s point about the reassurance of a fixed, consistent price for a product is still valid and could have a significant impact on CX and customer loyalty.
However, this does not seem to be an issue for all sectors.
Where’s the Value?
While transport giants Uber and Lyft have made surge pricing popular in recent times, at its core, it’s just another case of supply and demand.
Airlines and hotel providers have been using the model for years – increasing prices for certain times of year, if there is a particular event on, or more generally if a product becomes more popular.
In discussing why this practice seems more acceptable to customers than the idea of paying more for a burger and fries, Eric Dolansky – Associate Professor of Marketing at Brock’s Goodman School of Business – argues that it is down to what customers consider to be valuable:
“The difference is the perceived value for consumers when it comes to purchases such as travel versus physical products, such as food items, for which customers expect relatively stable prices.
“If customers don’t see a difference in value based on, for example, how busy a particular fast-food franchise is at a given moment, they won’t be willing to accept a higher price.”
This is at the crux of the Wendy’s backlash, as whichever way you try to dress it up, it is hard to convince customers that they are getting more value out of their transaction just because they are eating at a popular time of day.
For Merlin Entertainments, however, it does appear to be a more natural fit. There is clearly customer value in visiting a theme park on a warm sunny day.
O’Neil’s assertion that the dynamic pricing model will restrict overcrowding is also demonstrably desirable for customers, as evidenced by the popularity of queue jump passes.
While Picoult is right to point out that that price cannot be separated from CX, it also cannot be ignored that customers are willing to pay more for a superior service.
This is a point that Ryan Bourne – the R. Evan Scharf Chair for the Public Understanding of Economics at Cato – makes when discussing what he terms, the “breathless panic about the spread of dynamic pricing.”
Rather than something to be fearful or skeptical of, Bourne argues that dynamic pricing is actually a “boon for consumers,” explaining that:
“On two‐ sided platforms, where supply adjusts to fluctuating demand, flexible pricing delivers a better continuity of service. Where there’s a finite capacity of seats or tickets, flexible pricing ensures space goes to those who most value it, while opening access to off‐peak services through lower prices.
While he does still admit that there are areas of concern, particularly when it comes to products like groceries and fast food where customers still like to know what they’re getting for their pound, he cautions against being completely opposed to the pricing model:
What would be strange is to just assume there’s something inherently pernicious about it, and for the competition watchdog to impose restrictive rules that constrain it out of some arbitrary conception of fairness.
A Time and a Place
Although Bourne’s claims certainly have merit, arguably they work better in the abstract than in reality. His suggestion that flexibly priced train tickets will go to those who “most value it,” shows a lack of awareness for peoples’ financial situations.
A train ticket certainly has more value to a person on minimum wage struggling to make rent every month who needs to travel for work, compared to a wealthy person heading in to have breakfast at a new hotspot in town – one is a necessity, the other is a choice.
This is highly relevant due to the proliferation of dynamic pricing. While fast-food and theme parks are not essential, electricity is, and Ofgem’s announcement that it is consulting on introducing dynamic pricing for households to meet the demand of net zero will undoubtedly be a concern for smart meter customers throughout the UK.
As with Wendy’s and Merlin Entertainments, the new pricing model would work by charging more for using electricity during the busiest times of the day.
In discussing the proposed changes for smart meter users, Simon Virley – Head of Energy and Natural Resources at KPMG UK – said:
As we look to what a future retail energy market looks like, it will be key to balance proportionate consumer protection with incentives for investment and innovation in a smarter energy system that benefits all consumers.
Virley’s promise that the change will “benefit all consumers” may ring hollow to those who have already endured considerable price increases throughout a cost-of-living crisis, and will now potentially be receiving higher bills.
Like with Wendy’s, it will be incredibly difficult to outline where the customer value is for consumers who are having to pay more for something with no identifiable changes or benefits to the product.
And unlike Wendy’s, this is not even a product where customers will have a choice in the matter, as practically every person in the UK will need to use electricity at some point in the day.
Moreover, these changes could have a significant impact on employee experience and agent retention.
The cost-of-living crisis has already exacerbated the issue of customer service staff abuse, with the Institute of Customer Service conducting research that revealed that 44 percent of customer-facing agents are considering or have already considered leaving their roles as a result of abuse.
In outlining the triggers for the uptick in customer frustration, respondents listed rising energy prices and increased living costs, with 66% having seen changes in customer behavior as a result.
By introducing measures that could result in confusion about the new pricing system and anger at increased bills, Ofgem risks further alienating customer service workers.
While it is clearly too late to put the genie back in the bottle, and there are legitimate arguments for dynamic pricing providing customers with more value and enhanced experiences in certain sectors, it is not a model that is built for every product.
There is a lot to be said for dependability and consistency for certain customer interactions, and any business that threatens to remove this runs the risk of a Wendy’s-esque backlash.
