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What is a Dynamic Pricing Strategy?
Dynamic pricing is a strategy companies use to establish various market prices for products and services provided by different firms. It is done when businesses consider different variables, including the change between supply and demand, as well as competitive strategy or seasonality. Dynamic pricing is about using price changes to adapt quickly to the market. The pricing strategy focuses on variable prices and avoids fixed prices. The core idea behind the phenomenon is to sell the product at a different price depending on the target groups to which such product is sold.
When it comes to practical insights on dynamic pricing, there is an indication that companies can alter and update their price anytime for the sake of capitalization on the ever-changing market. There is a parallel between dynamic pricing and price discrimination, with both pricing strategies stemming from the Robinson-Patman Act of 1936. The legislation established the foundation for both pricing approaches and showed how pricing could become a major marketing and sales tool.
Dynamic Pricing Strategies?
When it comes to dynamic pricing strategies, one can present several key examples. Essentially, it boils down to dynamic pricing based on groups and dynamic pricing based on time.
- Dynamic pricing based on groups. This type of dynamic pricing entails using machine learning algorithms and various statistical methods to provide different pricing points to different groups. These indications are all directed at predicting a particular degree of willingness to pay based on location, demographic, machine type, and other important variables. Notably, most lawsuits appear from this part of dynamic pricing. Some suggest that using dynamic pricing based on groups is a discriminatory practice. It is a great way to offer a particular group of costumes what they want or desire.
- Dynamic pricing based on time. There are instances when the price can increase based on a particular time. It can be a certain part of the month, a particular season, or a particular holiday. Dynamic pricing based on time is often used when some company tries to push a quota. This type of dynamic pricing works because of the changing demand at different times. If it is Christmas Eve, one can anticipate the demand for particular products to be extremely high. If the demand is high, the inventory will be low. Respectively, companies boost prices to create a sense of urgency.
These two types of dynamic pricing present the core of the dynamic pricing approach. Essentially, time and geographics are two key factors driving the strategy forward. One can effectively use either of the strategies depending on what a company intends to achieve and with which part of a target audience.
How to Implement a Dynamic Pricing Strategy?
Considering the available pricing data and factors like sales indicators, one can create a tool for checking prices at a certain frequency. In such a case, implementing dynamic pricing comes with advanced analytics techniques fueled by Artificial Intelligence. These aspects can boost improvements in your pricing system.
What is more, dynamic pricing should be implemented by analyzing past data. Complex AI algorithms can look through massive volumes of data to recognize successful pricing patterns. Further, you set strategic goals and direct the insights from the dynamic pricing approach toward these objectives.
As you might have noticed, AI plays an important role in the entire process. To implement dynamic pricing, you need clear strategic objectives, sufficient data to gather and process, and insights that help align pricing approaches with broader business goals.
The dynamic pricing implementation process brings forward several notable examples of areas where the approach can be adopted:
- Ride-sharing. Dynamic pricing is broadly implemented among various ride-sharing services. Companies like Lyft and Uber constantly use dynamic pricing. For instance, if there is bad weather outside, the price of hiring a ride will increase depending on how bad are weather conditions. At this point, the ride-sharing industry uses time-based dynamic pricing.
- Airlines. Airline industries directly depend on a dynamic pricing approach. If you reserve a flight at the last minute, the price will be proportional. In addition, the price will also be higher if you want to get a flight during a weekend or a holiday. Through dynamic pricing, many companies can generate more revenues.
- Hotels. Price of a hotel room directly depends on the time of the year and geography. The price is seasonal. Besides, if there is no cultural avenue held in the hotel’s vicinity or the hotel is located in some densely populated area, the room price will be higher. Notable, the price for a hotel room in Manhattan and somewhere in Idaho will differ drastically.
- eCommerce. Various eCommerce stores use dynamic pricing. They adjust price points based on seasons, competitors, and internal efforts linked to launching new collections. For instance, in the outlet season, one can expect eCommerce stores to change pricing accordingly.
As one can see, dynamic pricing is not that hard to implement and can be applied in different scenarios. You need to know your strategic goals and business objectives to properly align dynamic pricing and ensure it brings the most benefit to your company and your customers.
Benefits of a Dynamic Pricing Strategy?
While dynamic pricing can be implemented across different realms and situations, it is crucial to understand the potential benefits it can bring. In such a context, the advantages of a dynamic pricing strategy are the following:
- Profit maximization. With dynamic pricing, companies can track the value of particular products faster and more easily. Besides, one can track competitors' prices and align pricing strategies accordingly. As a result, all these factors give a competitive advantage that can be translated into a higher profit margin.
- Understanding consumer behavior. Dynamic pricing helps companies understand core consumer behavior points. Marketing experts can use dynamic pricing to understand which promotions impact customers most. Knowing how consumers behave makes marketing strategies more accurate and effective.
- Automatization of benchmarks. Along with the ability to compare prices across competitors, a dynamic pricing approach can help companies keep up with competition quickly. With benchmarking automatization, businesses can automate the process of dealing with competition.
- Control over pricing approaches. Dynamic pricing grants a growing control over pricing approaches. The tool allows companies to access real-time pricing trends through thousands of products in the given industry. Dynamic pricing can witness supply and demand and price changes within a particular industry. The right degree of control helps set proper prices, bringing the most advantage to your company.
- Boosting brand value. Various eCommerce companies think dynamic pricing is the approach to avoid because it can hurt their brand image. In reality, the approach can help protect the brand image and even boost it by helping companies to set prices that reflect their brand value. What is more, changing prices accordingly can help stay flexible and profitable at teh same moment.
- Saving costs in the long run. Dynamic pricing uses real-time data on supply and demand. It considers various market fluctuations and closely monitors competition. With the right data, you can set optimal prices and still stay profitable regardless of market fluctuations. Having such an edge saves you money in the long run. Calculations are done by automated applications and grant you in-depth insights without breaking a sweat.
- Effective management. Having the correct pricing software ensures you can handle dynamic pricing effectively. The powerful algorithms can handle thousands of variables at the same time and provide an output that can later be translated into viable pricing strategies.
These benefits are only a few brought by the dynamic pricing strategy. With proper tools and understanding, you can have pricing strategies that bring revenue, boost brand loyalty, and improve customer satisfaction.
A dynamic pricing approach is one that can bring many advantages to companies. It should be implemented with a clear strategic objective and apparent business goal. Dynamic pricing can be used in eCommerce, ride-sharing, and the hotel industry. Besides, with the proper software, you can reap the benefits of the strategic approach.
Find answers to some of the most common questions people have regarding the use of Competera.
What is an example of a dynamic pricing strategy?
An interesting example of dynamic pricing can be linked to the events of the COVID-19 pandemic. When people started buying all the hand sanitizers and toilet paper, there was a major shift in the price of these products. The changing demand drives dynamic pricing and pushes companies to alter the prices.
How is a dynamic pricing strategy is done?
Dynamic pricing is achieved through variable prices or price changes instead of fixed ones. The core idea is to sell the same product for a different price to different groups of people. Dynamic pricing is done by selecting appropriate price changes correlating to particular target groups of consumers.