Many observers would argue that dynamic pricing--differential pricing of products based on criteria such as time of day, volume or some other criteria benefits both suppliers and customers. If peak loads, for example, can be shifted to off peak, there are capital investment advantages for suppliers.
That is why long distance calls once were priced dynamically: highest prices during workday working hours; lower prices on weekday evenings and nights and weekends.
On the other hand, consumer behavior suggests buyers often do not choose to buy dynamically-priced products, but prefer fixed-price, flat-rate subscriptions. We are left to try and explain why that behavior persists.
Disney’s latest quarterly report might suggest that customers prefer subscriptions to buying on a dynamic basis. Indeed, we might note the same behavior across a wide range of digital content or communications products.
Dynamic pricing, where items are purchased a la carte, by the piece and on demand, creates spending uncertainty. Prices vary by criteria such as volume purchased, time of day purchased, possibly how an item is purchased or any discounting methods a seller wishes to use.
Customers also have notions about the value of specific content items, whole channels or networks. Any customer who has compared the value and price of a Netflix subscription to the cost of buying content dynamically will conclude that the subscription seems to cost less, under any scenario of moderate use.
Where a linear video subscription--depending on the number of channels purchased--might cost $50 to $80 a month, a streaming service--depending on which services the customer wants to buy--can start at about $7 a month each but might cost $15 a month or so.
Buying only a few pay-per-view or on-demand items a month can exceed the cost of a Disney Plus, Netflix, Prime, Hulu, HBO Max or Peacock subscription, for example. Granted, no subscription offer from any single provider ever offers “most” content, so most customers likely buy more than one streaming service.
The point is that dynamic pricing offers the most value when a customer’s consumption is low, but offers less perceived value when consumption is moderate (possibly watching more than three movie or TV episodes a month that are purchased dynamically).
That same trade off exists with other products as well.
For buyers of cloud computing services, dynamic pricing is a better buy for customers with lower demand, variable workloads, small information technology support staffs or infrastructure and relatively lower adoption of new computing use cases.
Cloud computing is often not a better buy for customers with high computing workcycle demand, fixed or predictable workloads, large IT infrastructure, staffs and skills or high rates of adopting new computing use cases.
So there are good financial reasons for customers to see value in subscriptions that offer more content, at lower prices, compared to dynamic buys.
Many also would argue that the reason customers prefer flat-rate pricing, even when they might pay less buying on a dynamic basis, is unambiguous cost. Any dynamic pricing mechanism--buy by the instance or item--introduces uncertainty of cost.
Subscriptions offer a static price: the customer knows what the recurring cost is going to be.
Dynamic electricity pricing is not as popular as one might think, for example, even if consumers could save money consuming more energy off peak.
Virtually unlimited usage of domestic voice, text messaging or fixed or mobile internet access provide examples. Linear and over-the-top streaming video subscriptions provide other examples.
Likewise, music streaming has replaced music purchases. Most content subscriptions--physical or digital also are offered on a flat-rate basis. Changes in buyer demand are at work, as well as supplier preferences, but perceptions of value are almost certainly at work.
Customers seem to value broad catalog access without ownership to ownership of a fraction of the full catalog, which is what the shift to music streaming services, as opposed to content buying (song downloads) represents.
In the connectivity business there are analogies. Though usage-based (dynamic pricing) is common for some products (international calls in some cases), many other products are sold on a flat rate basis (unlimited usage of internet access, domestic voice and texting.
Other products are sold based as buckets of usage (subscriptions with different usage allowances). Customers buy subscriptions, but with different usage volumes included, typically with additional costs for usage above the allowance threshold.
That created the profit driver of “overage charges.” Historically, overage charges were a significant contributor to supplier profits, and avoidance of overage charges became a driver of consumer behavior.
Customers preferred to buy data plans with more usage than they ever expected, simply to avoid overage charges that introduced uncertainty of cost.
During the period of video rentals, such overage charges were a major driver of profit for video rental outlets, and a source of customer unhappiness as well.
For all those reasons, customers often prefer flat-rate pricing to dynamic pricing. They often prefer subscriptions to dynamic purchasing (a la carte, by the piece or instance) as well.
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