Dynamic Pricing is Everywhere … Even Npr

Chicago’s National Public Radio affiliate, WBEZ, started their fall/winter pledge drive earlier this week. As usual, the station offers a range of “thank you” gifts, with different gifts for different donation amounts. Going beyond the ubiquitous tote bag and coffee mug, this year WBEZ offers a stylish black and red (good color combo when you live in a cold place and your hockey team is the Blackhawks) knit winter hat. Make a donation of $120 and this cozy hat can be yours before temperatures plummet.

But WBEZ made an interesting and shrewd decision. Yesterday morning during rush hour, you could get the cozy winter hat for a donation of just $60! Limited time offer! After 10:00AM yesterday, to get the hat you had to donate the listed amount associated with the hat, $120.

The economics of this decision are fascinating and fundamental. First, note that the station is highly motivated to meet their fundraising target as early as possible, to shorten the length of the pledge drive and return listeners to regularly-scheduled programming. How does essentially offering the cozy winter hat at a 50% discount help achieve that objective? If the demand for the cozy winter hat pledge gift is elastic, then they can bring in more total revenue if they reduce its “pledge price” (students of economics will recognize this strategy as price discrimination). If they do that early in the drive, they can attract both listeners with a lower willingness to donate and procrastinators who might want the hat but may put it off and then forget. Getting those two types of potential donors to give, and give early, helps them accomplish the goal. The “limited time offer” nature of the deal also draws forward the procrastinators, and it does another valuable thing — it gives the hat a cachĂ©, a “hey, if I give $60 I’m getting a premium gift for a lower pledge price”. This pricing strategy draws cleverly on the psychology of wanting to feel like you’ve gotten a bargain, a good deal. WBEZ’s fundraisers have translated the economics and psychology of commercial consumption into community philanthropy, and they’ve done so quite deftly.

The cozy winter hat at a lower pledge price for a limited time is also an example of dynamic pricing. Dynamic pricing is a form of price discrimination that means charging different prices at different times. In this case the pricing is not so dynamic, since it differs only between earlier and later (I’ll have to listen toward the end of the drive to see if they offer it again!), and it’s a set of “posted offer” pledge prices rather than market-determined pledge prices (auction off those cozy winter hats!). But it contains the essence of dynamic pricing’s motives and incentives: giving some people a reason to change their behavior intertemporally. Dynamic pricing is becoming more widespread in the economy, and as consumers we are becoming more accustomed to it — think Uber’s surge pricing (about which some grumble but many do appreciate for how the algorithm brings out more drivers when demand for them is higher), or dynamic pricing in electricity, a topic both Mike and I have worked on and written about here. As digital technology reduces transaction costs it also expands the set of contracts we can enter, the ways we can buy, sell, and price goods and services. WBEZ is applying those transactional innovations to their philanthropy model, and I hope it serves them well.