Dynamic Pricing: Strategies, Examples, and Applications – Oveit
Recently, we’ve all seen concrete applications of dynamic pricing in different markets. Prices of everyday goods, such as toilet paper and hand sanitisers increased dramatically based on demand. Among other common examples of dynamic pricing, we can find happy hours at a local bar, airline pricing based on seasonality, and ride-hail surge this post, we’re going to identify different types of dynamic pricing strategies as well as help you establish if it’s an efficient pricing model for your business. What is Dynamic Pricing? In simple terms, the dynamic pricing model can be looked at as a way of selling the same product at different prices to different groups of people. This pricing strategy enables businesses to set flexible prices depending on current market demands. In this model, prices continuously fluctuate, in a matter of minutes, hours, or days, based on the market in which a business operates. Dynamic pricing, also called real-time pricing, surge pricing or time-based pricing incorporates many technologies to obtain a spontaneous range of prices. It allows businesses to modify prices based on algorithms and machine learning, considering competitor pricing. It’s not designed to work for every business or industry but among those that feel its positive impact, we can find: hospitality; travel; entertainment; e-commerce businesses; retail; electricity, and public transportation. Usually, this pricing model is more efficient among wealthier consumers since they have enough resources to cope with price variations. Consumers with more limited funds or other spending priorities might wait for lower prices or sales to purchase a product or service. Types of Dynamic Pricing strategiesThis pricing strategy can be applied in different forms. Each of them may be employed to reach different goals. These are some dynamic pricing models adopted by market leaders:Segmented pricing – This strategy is characterized by different prices for identical products, with the exact same production and distribution costs. It’s targeted for customers in different geographical areas, as the name ‘segmented’ suggests. The pricing differs based on a customer’s current location and it’s considered as a wise strategy to attract niche customers who place more value towards a service or product than others. It is used to increase revenue in areas where people are less sensitive to price pricing – This dynamic pricing strategy is directly related to the age of a product or its entry in the market. Therefore, by applying discounts and by reducing the price of older products, businesses can experience an increase in its sale. When new collections are introduced in the market, the prices of older ones can be lowered to get rid of that stock pricing – Peak hours/seasons = high demand. This pricing is directly related to market demand. With time, a business will find that a product or service sells much faster based on seasonality or rush hours. Most of the time, this translates into limited choices for consumers with a lack of competitors providing similar products or services. A practical example would be the cost of hotel rooms during peak seasons vs. the cost of a hotel room during fluctuations in market conditions – As we currently live in uncertain times, there is no better example of how vulnerable a given market can be. Therefore, if for any reason sales start to fall, companies should begin to lower their prices until things get back to netration pricing – This pricing is designed for newer products with initial lower prices compared to the market price. It’s applied when businesses want to reach a large portion of the market for customers to get familiar with their list of offerings. Prices are increased gradually as demand in the market Dynamic Pricing a good model for your business? There are some techniques that particular businesses can apply to make this pricing strategy work. First, transparency plays a key role. Customers must always be aware of the factors on which the price depends. You want to avoid situations where customers have no clue why they bought the same product for different prices. Another way to implement dynamic pricing would be through motivating your customer’s behavior. If your business is based on seasonality, it’s a given that last-minute purchases will cost the end user a lot more compared to bookings made well in advance. Let’s go over some industries where this pricing model proves to be extremely efficient. – Events While it’s still an under-utilised tool, if used accordingly, dynamic pricing can help event organizers generate more revenue and increase urgency. Based on the strategies mentioned above, event organizers should implement dynamic pricing by using time-based pricing and demand-based pricing. While ticketing generates an important portion of revenue, changing ticket prices based on demand and point in time is key. Therefore, it is not enough to simply increase the price of a ticket every 15 days if you don’t actually sell at least a pre-defined amount. Instead, prices should increase every 15 days and every time another 100 tickets have been sold. If only 50 tickets are sold within 15 days, it means that increasing the price is not the same event setting, food & beverage vendors should also use dynamic pricing. Think of a music festival that goes on for three days 24/7. There will be times when the number of participants will be relatively low. Therefore, lowering prices during those hours will increase sales and profits. It’s better to get rid of your stock and still make a profit rather than throwing it away. – Ride-hailing servicesUber, the world’s leading ride-hailing operator has implemented a dynamic pricing model since day 1. It controls the prices that customers pay based on demand. Whether it’s a public holiday, a snowy or rainy day, or some sort of public transport strike, the cost of fares and waiting time begin to increase. It’s what they call ‘surge pricing’. The first reason for its application is to increase the supply of drives in a given area by increasing the amount they get second reason is to reduce demand and waiting times for a ride. Customers that are not willing to pay a higher fee during busy hours will most likely try to find another alternative or wait for prices to get back to normal. Their ‘surge’ pricing model uses Machine Learning to estimate market conditions based on multiple factors. Real-time data, such as traffic and weather conditions are essential for accurate forecasts. Wrapping it upIf not used properly, dynamic pricing can cause serious problems. However, its potential opportunities for both businesses and customers should not be overlooked. It can maximize profits by employing price optimisation while making sure that goods and services are sold at the ideal price. If you run a business where supply and demand influence your product considerably, dynamic pricing is most likely the most efficient strategy to ensure a steady flow of using Oveit Pay, economy owners can onboard external vendors and create an internal payment system (closed-loop). How is this related to dynamic pricing? Well, transactions within this internal economy are updated in real-time. The available reports enable vendors to change prices strategically, based on demand and type of products sold. As a vendor, one has access to quantity and type of products sold and the exact time when that product was purchased. The system then customizes the menu and displays relevant products with price recommendations based on demand and available stock.
Article written by Pascu is the Customer Success Manager at Oveit, a company based in Austin, TX, which provides live experiences technology, both virtual and in-person. In 2019, Tudor completed his Master’s degree in International Hospitality, Events, and Tourism Management. Since then, his interest in the events setting grew significantly. Tudor is highly experienced in customer-oriented roles and he is ready to assist new and existing users while using any of the available Oveit products. Tudor played professional basketball at Lindenwood, an NCAA Division II University while completing his bachelor’s degree in Sports Management.
Dynamic Pricing – Economics Help
Dynamic pricing is a method firms use to constantly adjust the price of goods/services depending on demand. For example, if there is a surge in demand, firms respond to the market data by increasing price. New technology has increased the scope for more variable dynamic pricing, and it is increasingly used by companies, such as airlines, taxi companies and hotels. Dynamic pricing enables a firm to set multiple different prices and maximise total revenue.
Dynamic pricing requires
A degree of market power in setting prices
Consumers with different elasticities of demand and willingness to pay
An ability for the firm to be aware of how demand fluctuates
Prevent reselling between the different prices.
This is a simplified version of dynamic pricing. On the left, is a simple static price – a standard taxi fare to the centre of a city. However, at peak time, the firm could charge a premium price because demand is more price inelastic. For quiet periods, the firm could offer a discount price to encourage greater consumption. Overall the firm increases revenue. This works like standard price discrimination.
Development of technology
Modern technology allows much more sophisticated forms of dynamic pricing because the company can view real-time data. For example, if there is a bus strike on one particular day, demand will surge, and the company can raise prices instantly.
For a taxi firm, the increase in price during a period of surge demand can have a dual benefit – not only does it maximise revenue, but it also creates an incentive for taxi drivers to work during these busy moments. With dynamic pricing, customers are more likely to get taxis during popular times, though they would have to pay a higher price for the privilege.
Airlines increasingly use dynamic pricing to manage demand between different flights. If a flight is nearly booked up several months before the date, the company can increase the price to maximise revenue from the last few seats. Equally, if an unpopular time of the day is selling slowly, the firm can cut price. The advantage is that the firm is not stuck with inflexible prices but can deal with unexpected surges in demand.
Examples of dynamic pricing
Price setting for Uber taxis – where the company advertises the price will vary depending on demand. Consumers are able to see the likely price they will pay before committing to the taxi.
Tickets for professional sport. Major league baseball clubs have used dynamic pricing to set prices for seats. Demand varies depending on form, quality of opposition and other factors. For popular games, prices will rise.
Price of flights Easyjet, Ryanair – prices are constantly being revised depending on how well they are selling.
Google Ads. The price of paying for Google ads is determined by a marketplace supply and demand. Ads for competitive keywords will push up the price as there is more demand. If a keyword becomes less competitive, the price will fall.
Electricity companies. Companies can vary the price of electricity depending on demand and supply. For example, in summer with greater supply from solar panels and less demand for heating, prices will fall. On cold days, prices can be increased.
Pros and cons of dynamic pricing
Advantages of dynamic pricing
Firms can increase revenue and enable to run a wider range of services. Without dynamic pricing, it may be harder to get a taxi at a time of the day when taxi drivers don’t want to work.
Consumers who travel at unpopular times can benefit from lower prices. If you know off-peak times will be cheaper, it can enable low-income consumers to consume a good; they otherwise wouldn’t have.
Varying the price can enable the firm to pay employees a higher wage to work during peak times. This gives a benefit to employers, but equally, it can lead to lower wages during a slump in demand and greater uncertainty over wages.
Dynamic pricing is a way to avoid queues and excess supply. It can smooth consumption over fluctuations in demand. The idea of Uber was that it would prevent periods where you couldn’t find a taxi.
Disadvantages of dynamic pricing
Consumers who pay the higher price may feel ripped off.
Surge pricing can lead to bad headlines, e. g. high prices during a tragic emergency.
To combat these headlines, firms can place manual limits on the amount prices surge by.
Consumers may feel they cannot trust a company who is constantly changing prices. This could harm market share in the long-term.
Consumers encouraged to spend time finding ways around the dynamic pricing.
Cost to the firm of monitoring and evaluating data.
Related
Pricing strategies
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The Ultimate Guide to Dynamic Pricing | Omnia Retail
Dynamic pricing is when a company or store continuously adjusts its prices throughout the day. The goal of these price changes is two fold: on one hand, companies want to optimize for margins, and on the other they want to increase their chances of sales.
Dynamic pricing is a pricing strategy that applies variable prices instead of fixed prices. Instead of deciding on a set price for a season, retailers can update their prices multiple times per day to capitalize on the ever-changing market.
Dynamic pricing often gets confused with personalized pricing. But these two different types of pricing are extremely different from one another.
To put it simply, dynamic pricing looks at your products and and their relative value in relation to the rest of the market. Personalized pricing, on the other hand, looks at individual consumer behaviors and gauges (and changes) a product’s value based on past shopping experience.
Personalized pricing is controversial because it uses individual data and shopping formation that many consumers consider private and personal. It’s also somewhat risky in an age where consumers can interact with and talk to each other like never before. If Consumer A finds out they paid more for the exact same product than their best friend, their trust in a company will erode.
Dynamic pricing, on the other hand, allows you to capture extra sales and take advantage of a changing market without invading consumer privacy or trust.
Dynamic pricing in e-commerce
Dynamic pricing and e-commerce co-evolved together. As the internet became more sophisticated and online shopping grew, so has the need for dynamic pricing.
Consumer electronics was one of the forerunners in the retail landscape in terms of the trend towards online. As a category of elastic products that are sensitive to price changes, it makes sense. Retailers need dynamic pricing to stay on top of the market and continue to offer competitive prices.
But as consumer spending rises in this category (and with it the online market share), two developments that affect dynamic pricing have emerged:
1. Increased price transparency
As more people shop for consumer electronics online, the amount of comparison shopping also increased. Consumers are now far more likely to evaluate a retailer’s prices against the company’s competition.
This shines a spotlight on your product price and makes it the most important part of each sale. Since consumer electronics are typically highly elastic, a 5%-10% difference between your price and your competitor’s could be the deciding factor for a consumer.
2. More frequent price changes
Because of this increased demand for price transparency and matching, the number of price changes every day has increased dramatically since the dawn of e-commerce. Traditionally, the supplier or the manufacturer would determine the price of a product with a consumer advised price (CAP). However, this CAP quickly became irrelevant with the growth of comparison shopping online.
Today, prices are determined by the retailer instead of a supplier, and are based on a variety of variables, including general market trends, competition prices, and stock levels.
A variety of other categories, such as Toys and Games, for example, follow the same pattern: when online spending rises, so does the demand for price transparency. This, in turn, leads to an increased frequency of price changes and the use of dynamic prices.
This trend often also attracts new players on the market without physical stores, which makes it difficult for traditional retailers.
Although the traditional retailers have the first mover advantage, they are generally less flexible in adapting their (pricing) strategy. However, the retailers that do capitalize on their omnichannel advantage can move ahead of the pack.
Dynamic pricing software
Most retailers practice a most basic form of dynamic pricing by discounting items at the end of a season or using a clearance sale to get rid of extra stock.
However, dynamic pricing can go much further than a discount at the end of a season. When you use a dynamic pricing software, you can wield the power of data to capture more sales and take control of your assortment.
Today, almost all major retailers will use some sort of dynamic pricing software.
Dynamic pricing online
Dynamic pricing has obvious benefits online: you can follow the competition, adjust prices instantly, and easily capture quantitative metrics about your store to improve your performance.
Dynamic pricing offline
Dynamic Pricing is also useful offline. Through the use of electronic shelf labels (ESLs), you can easily apply dynamic pricing practices to your physical store. This helps you keep your prices up-to-date with what you present online, and makes pricing management easier.
What are some dynamic pricing strategies?
Traditionally, there are three basic ways retailers set their prices: the cost-plus method, the competitor-based method, and the value based method.
The cost-plus method is the most simple out of all three. All you need to do is take the cost of your product and add the desired margin on top of that cost.
The competitor-based method follows your competition. If your competitor changes their price, you’ll change your price as a result, whether that’s to be lower or higher than your competition.
The value-based pricing method follows the price elasticity of a product. Different consumers value items differently, so everyone has a certain threshold that they are willing to pay for a product. A value-based pricing method capitalizes on the public’s perception of the value of a product and charge accordingly.
Dynamic pricing software allows you to combine different pricing methods at the same time. Some softwares also allow you to incorporate other useful information, such as your stock levels, popularity score, and even the weather forecast.
How to implement dynamic pricing
Implementing dynamic pricing is a journey, one that has a lot of twists and turns. And it does create a big change in your organization. That’s why you should view the adoption of dynamic pricing as an opportunity to improve your overall pricing strategy and internal systems, as well as your overall margin.
Is it hard to get started with dynamic pricing?
After hundreds of implementation projects, we’ve come up with a five-step process to successfully implement dynamic pricing:
Define your commercial objective: Your commercial objective is like your company’s compass: it’ll help you navigate any institutional changes and keep you heading in the right direction. The commercial objective applies to more than just pricing and marketing, but it’s the first step for a successful dynamic pricing strategy. Learn more about how to define your commercial objective here.
Build a pricing strategy: Your pricing strategy takes your commercial objective, then translates it into strategy that your team will use to sell products. An example? Say your overall commercial objective is to be known as the cheapest retailer on the market. Your pricing strategy would then be to make sure every product in your store is cheaper than the competition’s offering. Learn how to build a pricing strategy here.
Choose your pricing method(s): Your pricing strategy tells you what you want to do. Your methods are how you’ll achieve those pricing goals. Your pricing methods are more specific than your pricing strategy.
Establish pricing rules: Pricing rules tell your dynamic pricing software what to do. You should set a rule for every product that the software needs to track and change.
Test and monitor: The final step for getting started with dynamic pricing is to test and monitor your software’s changes. Learn more about testing the effectiveness of your online pricing.
Frequently Asked Questions about dynamic pricing examples
What are 4 examples of dynamic pricing?
Examples of dynamic pricingPrice setting for Uber taxis – where the company advertises the price will vary depending on demand. … Tickets for professional sport. … Price of flights Easyjet, Ryanair – prices are constantly being revised depending on how well they are selling.Google Ads. … Electricity companies.Jun 12, 2019
What is dynamic pricing strategy?
Dynamic pricing is a pricing strategy that applies variable prices instead of fixed prices. Instead of deciding on a set price for a season, retailers can update their prices multiple times per day to capitalize on the ever-changing market.
What companies do dynamic pricing?
Uber, Amazon and Airbnb leveraged dynamic pricing to build multibillion-dollar businesses in record time. Whether you decide to build or buy this capability, dynamic pricing can transform companies that are willing to invest and experiment.Jan 8, 2019