What is Dynamic Pricing?

What is dynamic pricing?

Dynamic pricing allows companies to set flexible prices for their goods or services based on real-time 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.

Two types of dynamic pricing

Various industries employ different types of dynamic pricing based on their stock availability, market demands, and other factors. There are two main types of dynamic pricing.

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.

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?

The dynamic pricing model allows product or service pricing to be adjusted based on demand (or other factors mentioned earlier). Companies introduce multiple price points instead of having one price point to increase their revenue. 

Types of dynamic pricing strategy

1. Segmented pricing means customers are grouped in segments, and prices are set for groups. For example, returning customers can get items or services at lower prices.

2. Time-based pricing means changing prices based on service speed, such as charging more for same-day delivery.

3. Changing market conditions encourage sellers to adjust their prices. If sales are down, prices may also drop.

4. Peak pricing, or a peak load pricing strategy, means charging more during peak hours. For example, sports clubs may have peak-time memberships, and hotels charge more for weekend stays.

5. Penetration pricing is used when companies want to reach more customers. At first, businesses set their prices below the market average and then gradually increase them.

What is an example of dynamic pricing?

Airlines, sports tickets, transport services, and e-commerce websites are the most common examples of dynamic pricing. 

Airlines adjust their ticket prices based on demand. If demand is high, they raise ticket prices to generate more revenue. If many seats are left unsold close to the scheduled flight, ticket prices tend to go down. 

E-commerce websites also use intelligent pricing to control supply and demand. Their dynamic pricing strategy is often based on various factors, including inventory levels, competitors' prices, and shopper location.

What are the benefits of dynamic pricing?

• Stock management (supply and demand control)

Dynamic pricing allows managing demand in case of operational bottlenecks. Adjusting prices also helps sell out surplus products, if necessary. Acquired data on market trends allows companies to foresee a peak in demand and ensure required product supplies.

• Insights into consumer behavior

Having extensive data on consumer behavior allows companies to get to know their customers. For instance, data analysts can extract competitor information and calculate the minimum and maximum price a customer would pay. This information can then be used to adjust prices and generate more sales.

• Revenue

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

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 when people needed transport the most, for example, during a snowstorm in New York City. The company was accused of exploiting its customers.

Solution: Dynamic pricing should not turn into price discrimination. Healthy competition may benefit both companies and their clients, but trying to profit in, for example, force majeure situations may negatively impact a brand’s reputation.

Customer satisfaction

Introducing a variable pricing strategy is sometimes seen as a controversial business decision. Customers might find it unfair and choose other brands. 

Solution: Being transparent about real-time pricing is the way to go. Customers appreciate honesty and freedom of choice.

Data acquisition 

To implement surge pricing, companies need to constantly monitor their competitors’ prices in real-time. Data acquisition, especially on a large scale, is one of the main dynamic pricing challenges. 

Solution: Web Scraper API allows gathering large-scale data, even from the most challenging targets, in real-time. The API doesn't require any extra management or resources.

Is dynamic pricing legal?

Dynamic pricing is legal, but it has some exceptions. For example, price discrimination based on gender, race, religion, or nationality is illegal. Companies should also be transparent about dynamic pricing to avoid compromising consumer rights.

The US legal system states, "If different prices are charged to different customers for a good faith reason, such as an effort by the seller to meet the competitor's price or a change in market conditions, it is not illegal price discrimination.”

Conclusion

Dynamic pricing strategies are becoming more popular. They are used by airlines, retailers, e-commerce companies, and transport providers, to name a few. The main benefits of real-time pricing include increased control over pricing strategy, better stock management, and more revenue.

However, implementing pricing intelligence without the appropriate tools requires extensive resources. For example, large-scale data acquisition raises challenges that can only be solved with powerful data gathering solutions.