Last post, the font WordPress uses in published posts was unknown. It appears my beautifully clear Calibri ruminations were published by WordPress in Times New Roman with serif feet and flourishes, everywhere. It can’t be said for sure, because there are several other fonts available that use feet and flourishes, but if it looks like a flourish and smells like feet…

A new report was online this week about Dynamic Price Modeling (DPM). I’ve talked about it before under its old name: Price Modeling. Adding “Dynamic” makes it sound less stodgy, more, well, dynamic. First, a reminisce about pricing from the days of old. In pre-DPM times, a business looked at the costs involved in making a product. First are “Fixed costs (FC)” that don’t change no matter the quantity of product the business produces. These are rent, insurance, things you need for one product or one million. “Variable Costs”( VC) are the things consumed during production like raw materials, energy, shipping, labor, etc. Businesses total these costs for a certain period, then divide the sum by the number of products produced and find a “total cost per item”. Businesses use the total cost per item to decide the selling price of the item, its Retail Price. It is an important step because too high a Retail Price will limit total sales, but too low a Retail Price causes lower profit, and lower profit means business failure. We used to call it “Cost Plus Pricing” and it was a complicated and ongoing struggle to reach the perfect price for sales success and maximum profit. Most often Cost Plus Pricing did not yield a Retail Price of $100 for an item with a total cost of $1. Supply and demand market forces kept Retail Prices in line with total cost and businesses survived with modest profit.

Imagine a New Pizza Shop (NPS) making the best pizza in your area.  They sell pies for $15, make a nice profit and are happy. Then, a new pizza place realizes they can make a similar pizza and sell it for $12. Or a different new, newer pizza shop opens and sells their similar pizza for $16. Eventually local pizza eaters (The Market) will figure out the best pizza for the best price and that company will survive. Using Cost Plus Pricing, most pizza shops often “find” the perfect price through trial and error.

Now imagine NPS is using DPM. It offers pizza for $15 and immediately learns * The Market is buying $12 pizzas. NPS now has to make a decision about lowering its price. But what if through DPM, NPS learns almost the entire “Market” is buying pizza from NPS. DPM suggests NPS keep raising prices until they learn The Market will no longer buy NPS pizzas. All this happens instantly in this day and age.

Lowering prices, in my opinion, will almost never happen because of The Rich People. In our pizza shop world we assume The Market will work efficiently and reward the best pizza shop the most business. The Market will end up with the best pizza at the best price.

But with DPM, NPS eventually “corners” The Market with their best pizza at a decent price. Under DPM, NPS will eventually realize more control over the pricing than The Market has, and prices will rise and soon be out of proportion to a “total cost plus” formula: profits will soar.

Now add The Rich People to The Market, with unlimited disposable income and no correlated sense of affordability: DPM driven prices and profits will soar for NPS and non-rich people will no longer afford a pizza without taking out a loan. DPM can lead to the old school, black-hole monopoly, where only the very rich can afford anything as retail prices break free of “total cost” and rise to whatever The Market—and The Rich–will pay. It’s happening already in real estate and retail commerce. There are many markets where the same item from the same factory with the same total cost is sold for a different price. Eh, still okay, right? But what happens when a company realizes selling their product at a 15% profit in Market A is not worth selling it there because they can make 50% in Market B?

I’ve run out of space, but the point of the post is Dynamic Pricing Models are already eliminating non-rich people from some markets**. Where and when will it happen next?

*The local pizza market is not a good example, mainly because there isn’t enough profit in local pizza sales to justify the cost of Ai and the energy needed to maximize DPM. But car sales, real estate, Walmart, all are using DPM in the pursuit of maximum profit.

**The DPM market effects are not new. The speed at which they now happen, is. In the past, gaining control of The Market took time and often was constrained by slow communication systems. See the “Robber Barons” of the past, DPM pioneers.