What is Dynamic Pricing?
Dynamic pricing is a tactic businesses use that continually changes prices based on various factors, usually in minutes. Basically, the goal is to sell the same item at different prices under different conditions.
Amazon is one of the pioneers of this dynamic pricing — the retailer changes prices every 10 minutes!
This strategy is commonly used in several industries including:
- Ride-Sharing Services
- Travel & Tourism
- Sports & Entertainment
Obviously, companies across different industries will use different factors to implement their dynamic pricing strategy.
When Does it Make Sense to Use Dynamic Pricing?
Even though dynamic pricing is an effective strategy, nevertheless, it can only be used properly by businesses that meet the following criteria.
Understand Market Trends
Any company that uses a dynamic pricing strategy must be aware of all the various market forces that shape the industry. Otherwise, there’s no way of adjusting prices to meet market demand.
Dynamic Pricing as a Standard Practice in the Industry
If pricing is typically fixed in the industry, and consumers are reluctant to pay extra regardless of the conditions, then dynamic pricing doesn’t make sense.
Implementing A Dynamic Pricing Strategy
The most practical method of implementing a dynamic pricing strategy is to use rules-based algorithms.
Rules-based solutions enable companies to change prices to match what consumers are willing to pay for a product or service.
To do so, businesses use numerous factors to set the best price at the right time.
For example, these are some of the most common factors that e-commerce businesses use to set prices:
- Supply: Stock levels, current costs, upcoming expenses
- Demand: Product page views, sales of items
- Prices competitors use
Naturally, e-commerce brands bring down prices of items that they have in large amounts while increasing the prices of items that are selling well.
Various Types of Dynamic Pricing
Dynamic pricing strategies use different factors to set the price of items. Let’s take a look at the most common methods.
Dynamic Pricing Based on Time
Businesses typically raise prices when providing faster service. For example, buyers pay more for same-day delivery.
Retailers use time-based pricing for items that are in demand during certain seasons.
Dynamic Pricing Based On Competitors
This dynamic pricing strategy uses the prices of competitors as grounds for price adjustments.
Businesses can use this strategy in three different ways:
- Set prices slightly below those of competitors
- Use the same prices as everyone else
- Price products and services fairly above the rest
This is a tried and tested pricing strategy that helps brands remain on top in a competitive market.
Is Dynamic Pricing Fundamentally UnFair?
Ultimately, customers choose whether to buy something or not. If they are prepared to buy an item at a specific price, then their need is met.
However, if the price is too high, then consumers won’t make purchases and sales will plummet. As a result, the company will have to lower the price to a level where people will want to buy again.
In both cases, a balance is achieved.
Advantages of a Dynamic Pricing Strategy
Dynamic pricing is one of the most effective pricing strategies. Let’s go over the many important ways this strategy can boost both growth and revenue.
Makes It Easy on the Staff
When demand is high, businesses using dynamic pricing are able to offer higher wages to their staff.
Create Enticing Offers
Dynamic pricing gives companies the ability to launch promotional offers while generating profits. Bring prices down during a slump in revenue can help increase sales of certain products or services.
Companies can compete by making price changes in real-time. Quickly correcting prices in response to changing market conditions will help secure your position in the industry.
Choosing the Dynamic Pricing Solution
Businesses need a dynamic pricing tool that can set prices depending on market demand, inventory levels, and seasonality.
In order to make timely price changes companies require a fair amount of automation that algorithms can offer. However, creating algorithms requires both technical skills and regular supervision.
This is why every successful company uses a business rules engine to optimize its pricing platforms. Business rules engines are pluggable pieces of software that allow both non-technical and technical team members to write dynamic pricing rules.