Dynamic Pricing: Benefits, Strategies, and Examples
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Dynamic pricing is one of the most interesting topics that has taken the eCommerce industry by storm. It’s not a completely new and unfamiliar concept for companies. However, its development is more related to new eCommerce trends.
When talking about various different forms of pricing, it is dynamic pricing that stands out as a special strategy.
Let’s find out exactly why that is and what are the core benefits of dynamic pricing when implemented properly.
What is dynamic pricing?
Dynamic pricing is also referred to as surge pricing, demand pricing, or time-based pricing. This is a pricing strategy in which businesses can set flexible prices based on current market demands. To put it more simply, this is a strategy in which product prices continuously adjust. It may be in a matter of minutes, hours, or days, depending on the type of market.
In practice, dynamic pricing is often a responsive or a reactive pricing strategy. This means that you adjust your prices according to various market changes.
Generally speaking, this suggests reacting to changes in supply and demand in a timely manner, so you can capitalize on them. This is also the main incentive for companies to use dynamic pricing.
Let’s for a moment imagine we could go back in time – perhaps 20, 30, or 50 years. What questions would companies be preoccupied with?
How many people want a certain product? How many products are there in stock? How many product varieties exist? How many competitors are out there?
Nowadays, the emergence of tools for real-time pricing has made answering these questions much easier. There are many advanced ways to get data (in extremely large amounts) and analyze it. This process helps companies make data-driven decisions easier, including pricing decisions.
Main benefits of pricing changes
In today’s world of eCommerce, dynamic pricing changes became one of the most important tools to work with for several reasons. Let’s see what are the main benefits of dynamic pricing.
- Making quicker and more profitable changes in terms of sales. This way your business becomes more aware of market changes and can act with much more flexibility. For example, if some item is overstocked, the necessary reduction can be performed by offering discounts.
- Price optimization offers you the possibility to track and adjust the prices relative to those of your competitors.
- Having a better insight into industry trends. You would be able to gain valuable insights. Which items are bestselling? By which competitors, and by what price?
What types of dynamic pricing strategies exist?
Dynamic pricing strategy can appear in a few forms. Each of them can be used for achieving different goals.
- Segmented pricing: This strategy offers different prices for different customers. That means that the customers are divided into segments. For example, high-value customers can be offered higher prices. Here we can assume that they might put service speed and quality over price.
- Time-based pricing: Companies can use this product pricing method when they want to charge more for providing faster services. This means that you’re going to pay more if you want to have same-day service, or if you reached the company close to the end of the working hours.
- Changing market conditions: As you are aware, the situation in the market can change due to various factors. However, businesses must act accordingly. If for some reason sales begin to fall, the company will go for the strategy of lower prices.
- Peak pricing: This strategy can be used in many industries to charge more during peak hours. It has some similarities with time-based pricing, and you could look at it as its derivative. Both are at their core very dynamic approaches to pricing. Also, most companies that use these pricing strategies, also use a price optimization tool to improve their repricing process.
- Penetration pricing: The penetration pricing strategy is used when businesses want to reach a large portion of the market. By doing so, future customers get familiar with the offered product. In order to do so, companies set prices that are below the market prices and tend to increase them gradually.
- Price skimming: This pricing strategy is mostly used by companies who launch completely new products on the market. Since there is no need to worry about price competitiveness, companies can set a higher price and then lower it over time.
- Value-based pricing: As the name suggests, value-based pricing means that the customer has the upper hand. The price won’t depend on production costs, competition, and other factors, but mostly on how the customer perceives your product. The higher the value, the higher the willingness to pay. Thus, it’s no surprise that luxury brands are usually relying on this pricing strategy.
- Bundle pricing: In the case of bundle pricing, different products can be combined and offered at a lower price. This is usually well received among customers since they get to pay less. However, you need to pay attention that the combination of offered discounted products makes sense.
Would this pricing model work for you?
There are some things that you can do to make this product pricing strategy work for you.
First comes the transparency towards customers regarding your prices. Customers must always be informed about the factors on which the price depends.
Another useful way of implementing this strategy would be by motivating some of the customer’s behavior. For example, peak pricing helps widen profits during peak hours.
Some of the largest digital retailers in the world, such as Amazon, have implemented dynamic pricing and enjoyed huge benefits. However, some industries use this strategy all the time and in a very successful way. Maybe the best representative example would be airfare pricing.
What makes airfare so prone to price variations? First of all, airline companies are aware of different types of passengers.
They can be roughly divided into leisure and business travelers. Both of them need this service, but their behavior is quite different.
Leisure travelers are more flexible with dates (meaning that they tend to plan their trips). Business travelers have to travel on a certain day and often at a certain time.
This means that leisure travelers tend to book tickets in advance. The business ones are often obliged to make some last-minute reservations, willing to pay more. So, as we get closer to the departure date, the only seats available are the more expensive ones.
Also, there are some dates during the year when the demand is always higher – holidays for example. Airfare prices can vary also depending on the day or on the airline company.
Besides the airline industry, dynamic pricing found its place in sports as well. Dynamic pricing in sports is mostly related to maximizing ticket revenue.
Things to avoid in dynamic pricing models
Based on all the above, it might seem that this strategy has no weak points. However, if not used carefully, product pricing may very easily become a double edge sword.
Even though is used for comparing prices on the market, it must never be used as a tool for price discrimination.
Some companies, such as Uber, had to learn that the hard way. Uber operates as a low-cost ride service. Therefore, the decision of raising the price during rush hour was met with serious public criticism.
To make the situation even worse, Uber started implementing this method during a snowstorm in New York. That resulted in Uber being accused of exploiting its customers.
How to implement pricing changes?
So far you become somewhat familiar with the concept of this differential pricing strategy. But how can you implement dynamic pricing into your business?
With so many competitors in the market, it’s getting harder and harder to keep up. This can be managed effectively with the right software.
Monitoring hundreds of thousands of different products is an extremely challenging task, beyond the scope of most eCommerce businesses.
Dynamic Pricing Summary
This pricing strategy can cause some serious problems if it is not used properly. At the same time, it’s clear that it offers a huge specter of possibilities for businesses and customers as well.
As we’ve seen, the price is not firmly set. It changes depending on the type of product, industries, market conditions, demand in a certain year’s time, and of course, on the type of customer being targeted.
This strategy became very common in some industries. As time goes by, there are more and more industries of all sizes and types willing to try this method.
Also, with increased competition in the eCommerce market, retailers are faced with the tough challenge of maximizing profits.
Of course, while keeping their prices competitive. This is also the situation where dynamic pricing comes as an ideal solution.
What are your thoughts on pricing strategies? Let us know, we’d be happy to hear from you!