When you visit the market to shop for a product, then you know its price most of the time. For example, if you use a certain type of shampoo and toothpaste, it’s highly probable that you know the price of your product.
But it is not always clear to find out the exact pricing in the services industry like plumbing or electricians’ cost, doctors, lawyers and accountant’s fee. It varies because of multiple factors, for example, time of service and purchase.
Table of Contents
What is Dynamic Pricing?
Dynamic Pricing also goes by many names such as time-based-pricing, surge-pricing, demand pricing, and real-time pricing. By definition, it’s a pricing strategy where a business sets variable and flexible prices of its products and services depending on the multiple factors like demand, supply chain, competition, location, time frame, and other market conditions.
Most importantly, dynamic pricing depends on the marketing factors, not the behavior and attitude of the customers like in differential pricing strategy. That’s the main difference between dynamic pricing and differential pricing.
Dynamic Pricing FAQs
Although customers usually don’t like dynamic pricing of products or services, because it makes things uncertain, but when it comes to the legality of dynamic pricing, it is still legal. As long as, it follows certain marketing factors, then it is legal.
Dynamic pricing becomes illegal if it discriminates customers based on their race, gender, color or certain ethnic group.
Businesses and industries that often use dynamic pricing are entertainment, hospitality, tourism, electrician, retail and public transport. Since there are multiple factors, therefore, every business follows different approaches towards pricing.
Types of Dynamic Pricing Strategy
As we know that dynamic pricing is variable and not fixed. Therefore, it depends on certain variables and factors and it changes along with it. Different businesses follow different marketing strategies depending upon their circumstances. Here are some of the following types of dynamic pricing strategies that different businesses follow depending upon their circumstances.
- Segmented Pricing
- Service Time
- Time of Purchase
- Peak Time Users
- Changing Conditions
Segmented pricing is the type of strategy where certain segments of the people are capable and willing to pay more for the product or service. For instance, the pricing of airline tickets of business and first-class is higher because the rich and business people can pay more.
It is because certain people prefer luxury and comfort over price. Sometimes companies offer different services to those who are willing to pay more. Like if you pay more, then the company would provide you the warranty. Otherwise, there won’t be any warranty.
Service time is the type of pricing strategy when you deliver the product much faster than the ordinary time. For instance, the price of dry cleaning on the same day is higher. It is because casual delivery time is comprised of 3 to 5 days. When you want the service on the same day, then you have to pay more.
Some service providers offer faster delivery on big orders at the same price, the purpose of such offers is to increase the customers’ loyalty.
Time of Purchase
Time of purchase is a type of strategy when companies and businesses offer discounts on certain days. The price of airline tickets of economy class is much lower on certain days than the normal price. It is because the demand is lower during the offseason, the purpose is to increase the sale and create some demand even if it costs the company.
Transporters usually use a peak pricing strategy. For instance, the fare of trains and airline tickets is higher during the holidays, rush and crowded hours. It is higher because the services are in high demand if you don’t take the deal. Someone would avail of the offer.
The per-call rate is higher in the busy hours. The price of electricity is higher at 6 to 9 PM because people usually watch something on their TVs.
It is the type of pricing strategy when the life of the product is short and uncertain market condition. Businesses use this marketing strategy under such circumstances. According to a study conducted by the Olin School of Business that companies usually earn more profit by adopting a changing condition pricing strategy. Companies can increase their sales by lowering prices during the off-seasons. When the demand is higher, then they can increase their prices.
How to Implement Dynamic Pricing
Implementing a successful dynamic pricing strategy doesn’t just happen out of the blue. It is a step by step process, here it follows;
- Commercial Objectives
- Develop a Dynamic Pricing Strategy
- Choose a Pricing Strategy
- Develop Pricing Rules
- Choose the Product Range
- Formulate Pricing Rules
- Implement and Monitor
What is Your Commercial Objective?
First of all, you should define the objectives of your company that why it exists. The purpose is to find out what your business wants to achieve and what customers expect from the company.
Some businesses have clear cut goals like they’d provide free delivery or quick service to their customers. Or they’d like to increase the market share of their company. Or they’d have objectives like providing customer support or any other long term objectives.
Whatever the objectives of your company are, the point is that you should know and understand it fully before apply dynamic pricing. Once you know your commercial objectives, then you can apply it better because they help you to see where you want to be in the future.
If it takes time to develop your commercial objectives, then you should give it time and complete attention because they’re developed only at once.
Develop a Dynamic Pricing Strategy
Once you have drawn your commercial objectives. Now, you have to develop your pricing strategy that supports your business objectives.
For instance, if your company has objectives of increasing profit and more visibility, then you should adopt the high-runner strategy. Amazon usually follows this strategy, where you offer competitive pricing on popular products, but you charge more on the less competitive products. Once you bring the customer to your store, then it’s highly probable that he’d surf and check out other products.
The company should keep in mind two things while developing a pricing strategy. First of all, pricing strategies should be easier to implement. Secondly, it should be easier to evaluate.
There should be a link be between your company’s objectives and the prices you set, and you should also keep in mind the perception of the public.
Choose a Pricing Strategy
There are many ways to choose a pricing strategy, but these three methods are very common.
- Cost-Plus Pricing – it means the cost of the product, plus factory overheads, and finally the sale price.
- Competitors-Based Pricing – here you set the price of your product or service what competitors are charging.
- Value-Based Pricing – the value of product or service in the customer’s eyes. If customers perceive the value of the product higher, then the company would charge higher.
Different businesses choose a mix of 2 or 3 strategies depending on their requirement. For instance, cost-plus and value-based pricing or competitors based pricing, because that’s how it suits their business. Therefore, a business should choose a pricing method that suits its business requirements.
Develop Pricing Rules
Once you have chosen a pricing method, now you should develop rules. Those rules are more likely the algorithm and it’ll decide for you. However, it involves two steps;
Choose the Product Range
First of all, you choose the range of products that you have in your stock like; TV stock>10, where applying the price rule of X.
Formulate the Pricing Rules
Once you have chosen the product range, now fill the value X with price, where competitors’ pricing would X&Y and pricing would elastic.
Implement and Monitor
Now, you’ve reached the stage where you can implement the pricing strategy. But it’s better to make sure that your pricing method matches your objectives.
After implementing the pricing strategy, make sure that it should be working well and it should deliver the results what it was supposed to do.
If everything works out as planned, now you should go online. After having gone online, keep checking the results in terms of profits. If you start achieving your objective, it means that your pricing system is working well. If you don’t achieve your objectives, then it means the pricing strategy isn’t working out. Therefore, you have to repeat the process until you achieve it.
Advantages of Dynamic Pricing
Some of the advantages of dynamic pricing strategy are as follows;
Companies can increase their sale by dynamic pricing. It usually happens when businesses lower the prices of their product or services because less pricing attracts the attention of people. More sales help companies to achieve their sales targets that are difficult to achieve under normal pricing.
When the competitors of your company are selling products at higher prices, you can offer the same products at lower prices. By choosing the dynamic pricing, the sales of your company would increase. When the sale increases, then the profit margin would increase by more sales. All of this won’t be possible without dynamic pricing.
Saves Time and Costs
The pricing software that retailers most use is connected with the internet, and it keeps updating itself with the pricing of other competitors. With a few simple settings, you can launch the dynamic pricing. If you have to do manually, it would take a lot of time and resources to manage the whole stock of inventory.
When you offer the same product or service at a lower price by dynamic pricing, then you’d attract the attention of the market. More customers would come to buy your product or service, more customers mean more sales. More sales would generate more profit, that’s how you’d beat the competitors.
Disadvantages of Dynamic Pricing
Some of the disadvantages of dynamic pricing strategy are as follows;
Customers usually don’t like dynamic pricing because it makes them uncertain. After all, customers prefer fixed pricing of products or services. Customers don’t like it even when it saves them money on some occasions. Dynamic pricing makes customers feel like the company is overcharging them, or playing with them. Before applying dynamic pricing, make sure that it should match with the brand image of the company.
Risk of Price War
Dynamic pricing can sometimes escalate the circumstances. Like when one competitor lowers the prices, other competitors lower it more. The process continues until they reach a point where both competitors drown each other’s business. Pricing software is much better in this regard that it doesn’t allow companies to lower at a certain price.
Unable to Implement in Every Industry
Dynamic pricing is good, but it’s difficult to implement a dynamic pricing strategy in every industry. It is possible in the tourism, hospitality, and mainly in the service industry. But you can’t apply this strategy in the manufacturing industry, where there’re wholesalers and retailers are involved, the company can’t change its price every month.
The sudden increase in prices is a headache for many customers. For instance, Sydney shooting incident of 2014, when more people started contacting Uber, the pricing software Uber increased the prices up to 4 times higher because of the higher demand. The company justified it later that it was the software and it was difficult and risky for the drivers to be there at the incident, but it was a great headache for the people.
Examples of Dynamic Pricing
Ecommerce and online stores mostly use dynamic pricing because it is easier to implement via online rather than physical stores, you just have to change the commands, and software would do the rest.
Amazon relies heavily on its pricing software; it determines the prices of different products based on their brands value, competition and demands.
Hotels also use dynamic pricing. Perhaps you’d have noticed the same thing that the prices of food items and rooms in the offseason are much lower as compared to the in-season.
Uber, trains, and airlines are very a great user of dynamic pricing in the transportation industry. The price tickets increase in the holidays, weekends and busy hours because people usually travel during this time of the year. When the demand goes up, the fare also goes up.