Dynamic pricing is a pricing system that changes based on the demand for a product. The price changes can be done in real-time, or they can be programmed ahead of time.

Dynamic pricing is used by companies to maximize profits and reduce losses by adjusting the price of goods according to what consumers are willing to pay at any given time. Dynamic pricing has become increasingly common with the advent of computer technology and the internet, which make it easier for companies to track consumer behaviour and adjust their prices accordingly.

Dynamic Pricing overview

The term “dynamic pricing” refers to the process by which the cost of a product can change over time. The phrases “surge pricing,” “time-based pricing,” and “demand-based pricing,” among others, are also frequently used. The amount of demand for a certain product can fluctuate depending on a variety of elements that are present in the market. Therefore, neither the demand nor the price should be considered a fixed component of the market.

The purchasing power of consumers, their level of willingness to pay, their income level, the value of the product, and other aspects all have a role in determining the level of demand for a given good or service. Businesses work to increase demand for their wares by implementing a variety of pricing methods, such as discounts, offers, clearance sales, raising prices temporarily to attract customers’ attention before lowering them, and other similar tactics.

A pricing technique for businesses known as dynamic pricing links the price to the level of demand in the market. The level of demand for a product will have a direct impact on its price. The price shifts that occur as a result of using a dynamic pricing approach are so unpredictable that they frequently occur every minute, hour, day, and so on.

The ultimate objective of this tactic is to regulate the pricing in accordance with the demand in order to increase sales. This method of pricing is used in a variety of businesses. Some popular ones are e-commerce, airline, tourist, transportation, retail, and entertainment industries. Companies use cutting-edge methods to monitor and adjust prices, such as computational models, automated intelligence, and other similar technologies.

Types of Dynamic pricing

There are many things that can influence the price of a product so that it can shift at any time. The following is a list of the five forms of dynamic pricing that can be further subdivided based on the following criteria:

Segmented Pricing: The market is made up of several client groups or segments. Premium buyers want a product to be of the highest quality and value rather than just being inexpensive. As a result, the identical product is provided to two distinct segments of clients at two different rates.

Time-Based Pricing: Because e-commerce mostly employs dynamic pricing, consumers have grown accustomed to relying on the internet to purchase just about anything and everything, including necessities, products, appliances, jewellery, clothing, food items, pharmaceuticals, beverages, etc. People will pay more for goods the quicker they desire it. The demand for many products changes during the day. Transportation costs vary according to the time of day, just as cab fares. This tactic is used by delivery and courier services if a consumer requests same-day delivery, etc.

Changing Market Situation: It is extremely uncommon to have a scenario where both buyers and sellers come out ahead. Sellers set their prices and sell their products in accordance with the state of the market, customer demand, and product value. Price increases and decreases are inversely correlated with supply and demand.

Peak Pricing: Another well-known tactic is peak pricing. For instance, there may be a spike in demand for some products during a particular season. As an illustration, hotels during the holiday season, umbrellas in the rainy season, winter clothing in the snowy season, etc.

Market Penetration Pricing: Market penetration is a corporate strategy that aims to boost sales, attract more customers, expand market share, and improve prioritising. The corporation may desire to reach a significant section of the market regardless of season, time, or market shift. In a penetration pricing strategy, firms may cut their prices for existing or new products, attract customers, and build a loyal client base. However, a company cannot continue to supply items at low prices; it must progressively transition from marginal revenue to profit-making.

Dynamic Pricing Examples

Hotels: Changes the price of their accomodation as per seasons and availability.

Airlines: price variations can be seen during seasonal changes and also during festival time.

Toilet papers: During the covid-19 period the demand of toilet papers in Australia was higher and the price was sky rocketing.

Advantages of Dynamic Pricing

The following are the advantages of dynamic pricing:

• It supports to uplift business profit.
• Supports businesses to enhance their market share.
• Supports businesses to improve their research about clients to apply and reap fruitful advantages.
• Helps to settle unsold inventory.
• Helps to find the price variation customers willing to pay for their products and services.

Disadvantages of Dynamic Pricing

Following are the disadvantages of dynamic pricing:

• Higher fluctuation leads to confusion and makes them upset about services or products.
• Variation in price makes it harder to sell items as customers are always willing to buy products as the price goes down and waits for the lowest price possible.
• Leads to unhealthy pricing completion.
• May not be suitable for small companies as they can’t bear the monetary loss.

How to Implement Dynamic Pricing

To implement dynamic pricing, you’ll need to first determine which kind of dynamic pricing strategy will work best for your business. Let’s see a few steps to implement dynamic pricing:

Step 1: Define a pricing strategy and objectives.

Step 2: Identify the product or service’s value proposition.

Step 3: Determine the target market segment for each product or service.

Step 4: Set price points that are within the target market’s range of acceptable prices.

Step 5: Develop a pricing strategy that meets all your company’s objectives.