Adjusting prices based on market demands is not a new concept, but it is more relevant than ever. Not that long ago, dynamic pricing strategy was based on past sales data. Market demands were forecasted by analyzing seasonal and cyclical trends. Today, dynamic pricing involves more sophisticated procedures such as large-scale data gathering and analysis.
Dynamic pricing has many equivalents, including surge pricing, demand pricing, intelligent pricing, real-time, or time-based pricing. In a broader sense, dynamic pricing strategy is part of pricing intelligence: a process where businesses gather and process data to adjust pricing strategies and grow profit.
Let’s learn what is dynamic pricing and its strategies with specific examples. You will also learn about real-time pricing benefits, challenges and their solutions.
What is Dynamic Pricing?
Dynamic pricing strategy allows businesses to set flexible prices for their goods or services, based on real-time demand. Prices are adjusted based on supply and demand changes, competitor prices, and other market conditions.
Introducing dynamic pricing into business strategy is sometimes seen as a controversial decision. If companies abuse real-time pricing, it might damage the brand. This will be further explained under dynamic pricing challenges.
Various industries employ different types of dynamic pricing, based on their stock availability, market demands, and other factors. These are the two main types of dynamic pricing:
#1: Supply Limited
Dynamic pricing with limited supply means dynamic prices change depending on customer behavior. This type of dynamic pricing is most common in travel and transportation industries, when supplies are limited or expiring, such as airline seats or their upgrades.
#2: Price Matching
Matching prices means changing prices of goods or services because competitors changed theirs. This type of pricing is not based on demand changes or expiration dates and is most common in the retail industry.
What is Dynamic Pricing Strategy?
Dynamic pricing model allows to adjust product or service pricing based on demand (or other factors mentioned earlier). Instead of having one price point, companies introduce multiple price points in order to increase their revenue.
Types of Dynamic Pricing Strategy
1. Time-based pricing means changing prices based on service speed. For example, charging more for the same day delivery.
2. Changing market conditions encourage sellers to change prices depending on the market. If sales are going down, prices may drop as well.
3. Peak pricing, or peak load pricing strategy means charging more during peak hours. For example, sports clubs may have peak time memberships, hotels charge more for weekend stays.
4. Penetration pricing model is used when companies want to reach more customers. At first, businesses set their prices below market average and then gradually increase them.
What are the Benefits of Dynamic Pricing?
Dynamic pricing has a number of advantages, and here are the main ones:
#1: Stock management (supply and demand control)
Dynamic pricing strategy allows managing demand in case of operational bottlenecks. Adjusting prices also helps to sell out surplus products, if required. Acquired data on market trends allows companies to foresee a peak in demand and take care of required product supplies.
#2: Insights into consumer behavior
Having extensive data on consumer behavior allows companies to get to know their customers. For example, data analysts can extract competitor information and calculate what minimum and maximum price a customer would pay for a product or service. This information can then be used to adjust prices and generate more sales.
Introducing multiple price points generates more profit than having a single price point. Revenue increase is one of the main benefits of real time pricing.
Dynamic Pricing Challenges
#1: Price Discrimination
Real time pricing brings healthy competition to various markets. However, real life examples show that some businesses may take it too far and even harm their brand reputation.
Raising prices during peak times might backfire as it did for Uber, a ridesharing company. The company introduced higher prices during times when people needed transport the most, for example during a snowstorm in New York City. The company was accused of exploiting its customers.
#2: Customer Satisfaction
Introducing a variable pricing strategy is sometimes seen as a controversial business decision. Customers might find it unfair and choose other brands.
#3: Data Acquisition
In order to implement surge pricing, companies need to constantly follow their competitors’ prices in real time. Data acquisition, especially large scale, is one of the main dynamic pricing challenges.