What do Taylor Swift, movie theaters and Uber have in common? Dynamic pricing. Whether it’s the latest concert tour, weekend prices or surge pricing after a night out, prices continuously change based on several variables.
This article will break down dynamic pricing and explain the types, examples, pros and cons, strategies and software.
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Article Roadmap
- What Is Dynamic Pricing?
- Types
- Examples
- Pros and Cons
- When and How To Use Dynamic Pricing
- Dynamic Pricing Software
- Next Steps
What Is Dynamic Pricing?
Dynamic pricing is a strategy businesses use to modify the prices of goods or services based on market variables. It’s also known as demand pricing, surge pricing or time-based costing.
External market factors like supply and demand, competitor prices and customer behavior drive non-static prices. Although it may sound complex, we see dynamic pricing frequently in everyday life. Happy hours and seasonal sales are two ways time-based costing can benefit customers. The flipside can involve rocketing flight prices and even lawsuits filed for absurd concert prices.
Types
Combining all the different types of dynamic pricing into one model would be like jamming multiple genres of music into one song (Bohemian Rhapsody does it, but it’s an outlier). Here’s a breakdown of the many forms of demand pricing:
Group-based Pricing
Disposable income isn’t standard across the board. Some groups are willing to and can pay more for specific offerings. Sometimes this is straightforward, like veteran discounts. Other times, it’s more complex, like split testing for online shopping via social media.
Time-based Pricing
If you’ve struggled with sky-high prices when trying to book an Uber after a night out, that comes down to time-based pricing. Prices change as demand changes throughout the day or if sellers want to incentivize customers to purchase at a certain time, like happy hours.
Cost Plus Pricing
Unlike other dynamic pricing types, cost plus pricing depends on internal factors. Companies base their price on the cost of production and tack on a preset profit. Although they may underprice some customers, it does build goodwill and lowers the risk of pricing decisions making it a popular option.
Competitor-based Pricing
Keeping up with the Joneses is another way to hack it. Businesses base prices on competitor standards to stay in touch with changing prices. You can see competitor-based pricing while online shopping when websites offer price matches.
Price Elasticity
In a world where economic theories aren’t just theories, you’d ideally price your products where supply meets demand. Essentially, you want to charge customers based on the value they place on the product and what they’re willing to pay. However, this works better in theory, thanks to the intricacies of human nature.
Bundle Pricing
Instead of selling complementary goods individually, companies sell them as a bundle, usually at a better deal for the customer. Think online and print subscriptions to news organizations or discounts offered for combining multiple online streaming services.
Examples
A picture is worth a thousand words, and there’s nothing like an example to illustrate the point.
Here are some real-world models to drive the point home:
Amazon
Sellers on Amazon use internal repricing tools to modify prices based on market conditions. Prices change daily to adjust to customer demand and competitor prices.
Uber
Booking an UberX during peak hour traffic and midday are two different things.
Surge pricing accounts for increased demand and incentivizes rideshare drivers to head to the location where surge pricing is activated.
Ticketmaster
Bruce Springsteen fans and Swifties can attest to Ticketmaster’s “discriminatory” dynamic pricing strategy to sell concert tickets. Springsteen fans were shocked by the $4,000 pricetag based on demand, while Swifties in the queue alleged excessive demand drove prices up.
Pros and Cons
Like yin and yang, there are advantages and disadvantages to implementing a dynamic pricing strategy.
Pros
Greater Control Over Your Pricing Strategy
Real-time data in dynamic pricing is a blessing, not a curse. Automated algorithms and instant price updates help you implement pricing plans more efficiently and modify prices to meet market conditions.
More Revenue
Consumer insights can help you determine their willingness to pay. Dynamic pricing allows you to implement those insights to maximize revenue.
Added Flexibility
Many companies worry about diluting their brand with lower prices or alienating customers with higher prices. Setting price floors and ceilings will enable you to sell during slow times and regain revenue when demand swings up again.
Customer Insights
Understanding your customers is key to successfully implementing dynamic pricing. Monitor customer trends, conduct surveys and purchase behavior to stay in touch with your consumers’ wants.
Cons
Lost Customers
Trust is vital in any transaction. Customers who believe they’ve been charged more than others for the same offering may not become repeat customers. Fluctuating prices may also hamper brand perception.
Price Wars
The absolute worst-possible outcome is a price war. Matching competitor prices can be perilous if larger competitors offer steep discounts for a sustained period.
Time-consuming
Missing a beat with market trends can be costly. Constantly monitoring conditions and updating prices is part and parcel of a dynamic pricing strategy. It can be time-consuming to stay on top of things.
When and How To Implement Dynamic Pricing
Choosing to implement dynamic pricing isn’t an impulse decision you can make by flipping a coin. First, you’ll need to assess if your product and the market you serve will be a good fit.
Answer the following questions to see where you stand:
- Does your company have the data and tools to determine changes in demand?
- How elastic is the demand for your product?
- Will you be able to handle the costs?
- What is your customer demographic? How will they react to time-based pricing?
- Do your competitors use dynamic pricing?
Once you’ve given dynamic pricing the green light, implement your pricing strategy using the steps below:
- Determine your objective: Implementing a dynamic pricing strategy without a proper objective is like using a map without a final destination in mind. Get into the nitty gritty of why you want to use non-static pricing. Is it to increase profits, drive sales, penetrate new markets or something different?
- Define your value metric: Put simply, you want to understand what your ideal customer would like from your offerings and how much they’d be willing to pay.
- Choose a pricing strategy: Once you nail down your objective and know how customers value your product, you can choose a strategy that will get you to your goals. Maybe discounts would be effective, or perhaps surge pricing is a better fit.
- Test your strategy: A dynamic pricing strategy is a work in progress. Returning to the drawing board is vital if you aren’t meeting your objectives.
Dynamic Pricing Software
If manual data monitoring and quick maths aren’t your forte, dynamic pricing software could be your knight in shining armor. It uses AI-powered strategies, extensive data monitoring and intuitive price engines to automate price optimization. You can also set pricing rules and update prices in real time. Ideal features include price management, data reporting, AI-powered price optimization, pricing rules and strategy.
It’s crucial to look for a solution with native or third-party integrations with CRM, sales quoting and business analytics, as software doesn’t exist in a vacuum. Check out our buyer’s guide for more in-depth information.
Next Steps
Figuring out a dynamic pricing strategy without a roadmap can feel like trying to solve Travis Kelce’s routes. CPQ software with an intuitive pricing engine goes a long way toward making the right play. Use our free requirements template to pinpoint your needs and make the selection process easier.
How can dynamic pricing benefit your business? Let us know in the comments below!