Dynamic pricing is a pricing strategy that uses flexible prices instead of fixed ones. Prices vary based on different changes in the market, such as competitor pricing, demand, supply, time, and customers’ behavior.
In the article, we will describe the importance of dynamic pricing, its advantages and disadvantages, and types of dynamic pricing. We will give a step-by-step guide on implementing a dynamic pricing strategy and take a look at some examples.
Why is dynamic pricing important?
Let’s discover the importance of a dynamic pricing model. There are a few reasons why business owners choose it for their companies.
Firstly, there is a great chance to increase sales with dynamic pricing. You can adjust to the ever-changing market and react faster to current demands. For example, there might be periods when lower prices can trigger sales and increase revenues. On the other hand, there might be periods of high demand when it is better to raise prices, catch the sales opportunities and maximize profits.
Secondly, it is difficult to set certain prices based on dynamic parameters. Nowadays, many complex products are on the market, so such situations are often encountered. Organizations use dynamic pricing strategies to manage a range of pricing alternatives and adjust the prices according to the relative value on the market.
Now you know the main reasons why dynamic pricing is important. In the next section, we will describe the pros and cons of this pricing strategy.
Advantages and Disadvantages of Dynamic Pricing
The main idea of dynamic pricing is to make businesses more flexible and increase the margin by reacting to the customer’s demand. However, as with every strategy, it also has advantages and disadvantages.
Advantages of Dynamic Pricing
Prices can reflect demand. Certain products are in high need during specific periods and are in low demand during others. Dynamic pricing is a way to reflect the changes and increase profits according to the number of people interested in certain products.
For example, Christmas decorations are in high demand in December, so it is a great time to increase their prices to earn more. At the same time, no one needs them in summer, so you can decrease prices to boost sales. This strategy can also be used in grocery shops, before the events, air transportation, etc.
Price changes can trigger sales and increase profits. You can use dynamic pricing to boost either profits or sales. Lower prices can trigger people to buy more and increase demand. Adjust the prices according to the behavior of your customers to earn more.
Get more insights into customers’ behavior. You can calculate the demand curve for your clients and discover the minimum and maximum price they are ready to pay for a particular product. Keep track of customers’ behavior, think about necessary changes, and beat the competitors by providing a better customer experience at a lower price with dynamic pricing.
Your business becomes more flexible. Using the dynamic pricing strategy can help you not to concentrate on keeping prices stable, as you can change them anytime. Focus on other aspects of business, improve business operations, and look for new sources of revenue instead of worrying about prices.
You can manage your product line better. Sell the overstocked products with a discount and increase prices for products with high demand. You can control all the changes in the numbers of items you sell and maintain the flow with a dynamic pricing strategy.
Disadvantages of Dynamic Pricing
This strategy may cause resentment among consumers. People can buy the same products at different prices, which means that someone will pay more than the other. Customers are often upset because they paid a higher price and can become hostile to your company. However, the ones who saved money and spent less might return to your brand again and again.
Clients can beat the system. Many people understand the dynamic pricing strategy, so they figured out the methods to deal with it. People know that if they shop too much for a certain product, the price might rise. So, customers started using private browser sessions to limit the number of information about themselves.
Some tools help people compare prices on the same products in different companies. People can buy the cheapest ones without caring about a specific brand, just about the price. It decreases the brand’s loyalty and defeats the strategy of dynamic pricing.
There is always the risk of dumping prices and price fluctuation. If you lower the price using a dynamic pricing strategy, your competitors may make their prices even lower. It will cause dumping and be harmful to all the business owners.
Using dynamic pricing also can cause pricing fluctuation in the sphere. If you increase prices and your competitors lower them simultaneously, it won’t attract customers to your business and cause a loss of sales.
It does not work well in all spheres. Dynamic pricing strategy may suit certain spheres, such as retail, air transportation, hospitality, etc. However, there are some businesses where it works badly. These spheres prioritize customer satisfaction and brand image instead of chasing profits.
Now you know all the pros and cons of this strategy. Continue reading to discover the most often used types of dynamic pricing.
Types of Dynamic Pricing
To effectively use a dynamic pricing strategy, you need to know how to change the prices based on different metrics. Let’s look at the most popular dynamic pricing types, their peculiarities, and the spheres of usage.
Pricing based on groups
Within this type of pricing strategy, companies use different algorithms or machine learning to set up different prices for different segments of people. Prices vary based on location, demographic information, social status, and other information about customers found on the open resources. This is the most doubtful type of dynamic pricing because if people discover it, they are often upset about the company’s policy. It harms brand loyalty and brand image.
Pricing based on time
This type of dynamic pricing is often used in online retail, utility pricing, and electricity pricing. It means that prices can change depending on the time of the day, day in the month, and even on a real-time basis. For example, online shops may set higher prices from 9 am till 5 pm, during the higher demand.
There is also critical peak pricing. It means that prices are set up on a time-of-use basis except for the critical days when they can rise to reflect some other expenses.
It is one of the most often used types of dynamic pricing. The price formula is the average fixed cost plus a certain amount of profit. However, this strategy does not reflect many factors, such as consumer value, competitors’ prices, changes in the market, etc.
Pricing based on competitors
If you want to succeed in the competitive environment, it is vital to keep track of your competitors' prices. This strategy is often used in online retail. For example, Amazon is one of the leaders in the sphere and changes the prices regularly, which encourages its competitors to adjust.
In case of high competition in the market, companies tend to cooperate. Setting up almost similar prices helps avoid dumping and increases profits for all businesses.
Pricing based on the value
In the ideal scenario, the pricing of certain products should be equal to their value for customers. However, it is almost impossible because the value can differ from customer to customer. Moreover, it depends on the time and a certain retailer. Use value analysis as a guideline in your dynamic pricing strategy.
There is also a subtype of this pricing type called conversion rate pricing. It measures the percent of visitors of a website who turn into buyers. When the conversion rate increases, the prices on a website increase too. This strategy is used among online shops, and its peculiarity is that customers can influence the products’ prices.
According to this dynamic pricing strategy, the price of a product depends on whether it is bundled with the other products. The prices for bundled products are lower than the prices on the same products separately. This type is often used in subscription-based platforms, printed media, and online courses.
Now you know the most popular types of dynamic pricing strategies. Read the next section to discover how to use it within your company.
How to implement a dynamic pricing strategy?
Many business owners want to change their pricing strategy and implement dynamic pricing into their policy. Below we provide a step-by-step guide on how to do it successfully.
- Define your commercial goal. Decide on your priorities besides making a profit. This goal will lead you and navigate you in the right direction during your business development, especially in pricing strategy and marketing.
- Discover more about your target audience. Who do you sell your products to? Quantify the approximate number of clients and find their common peculiarities. There might be a few different groups of your customers. You can offer different services, packaging, and pricing to every group in such a case.
- Calculate other metrics which influence the price. If you want to use a cost-plus dynamic pricing strategy, ensure you calculate proper metrics. While setting up your prices, keep in mind all the product development steps plus your profit.
- Build a pricing strategy. It is essential for every business. Choose from the dynamic pricing strategies provided in the article or develop a complex one. Then turn it into a plan for your team to use. Concentrate on your commercial goal and think about the ways to reach it.
- Choose your pricing methods and rules. Methods and rules are the next steps to developing your dynamic pricing strategy. They are more concrete and more practical. Think about how you will set up prices for every product. Develop the system of discounts and consider high-low pricing.
- Test and make changes if necessary. Launch your product and follow a dynamic pricing strategy. Test different price variants and monitor the changes in demand and income.
There are spheres where most companies use dynamic pricing strategies. Look at the examples and their peculiarities below.
Dynamic Pricing Examples
Dynamic pricing is often used in many industries such as air transportation, rideshare services, hospitality, and retail. Read more about them in this section.
All travelers know that prices on airline tickets to the same destination change according to the departure time, season, holidays in the area, and many more. Most airlines use a dynamic pricing strategy based on time. They developed expensive computer programs which change prices automatically according to specific metrics.
There are many taxi and rideshare services, like Uber, which use the dynamic pricing system. Prices always rise when it is rainy or snowy outside and during the rush hours. It means services use dynamic pricing based both on time and value. Moreover, food deliveries often use the same strategy in their work.
Like airlines, hotels set up prices according to the time and season. During the peak season, prices are much higher, and businesses earn most of their income. During the other time of the year, there are lower costs charged. There is also a strategy based on the demand and value. It means that hotels try to find the highest price customers are ready to pay. When the demand increases, business owners raise prices too.
Online retailers often use dynamic pricing based on demand. Many online shops use and even develop special software to track how many people are interested in certain products. The higher demand — the higher prices for customers.
Congrats, now you know all the key information about dynamic pricing. Think about how to use it for your product line and increase your business's profits.
Last Updated: 24.05.2022