The growth of a company rests on its pricing strategy. Profitable businesses need to cover operational costs while offering products and services at prices that generate sales and revenue. Pricing tactics are set by countless factors such as market demand, competitors’ tactics, and future economic outlook. Dynamically-based pricing is a tried and tested way of increasing market share it sets prices taking into account the willingness of potential customers to make purchases.
What Does Dynamically Pricing Products Mean?
Dynamic pricing is a tactic used by businesses that constantly alters prices using any number of variables. This is why it’s sometimes referred to as real-time pricing. The basic idea behind this strategy is to have different prices in different situations for the same items.
Online giants like Amazon have really popularized dynamic pricing — the company can make price changes every 10 minutes!
Dynamic pricing is used in different industries such as
- Event Management
Obviously, each sector uses different variables as a basis for its dynamic pricing strategy.
Dynamic Pricing Strategies
Let’s take a more detailed look at some of the most popular dynamic pricing strategies.
Seasonal Dynamic Pricing
Time is one of the most common variables that drive price adjustments.
Companies use time-based pricing to increase prices more when providing fast service. For example, when shoppers need to pay more for same-day delivery.
This approach to pricing is often employed by eCommerce businesses that offer products that are seasonal in nature. For instance, online retailers that specialize in winter clothes will need to lower their prices during the summer.
Surge pricing is a typical example of time-based dynamic pricing made popular by online rental platforms like Airbnb.
Rental prices on such platforms surge during peak holiday seasons in tourist destinations. Airline companies also use this strategy when passengers want to purchase the few remaining seats for a popular flight.
After a while, a business will figure out that a product or service sells much quicker during certain hours of the day.
Dynamic Pricing Based on Competitors
Competition-based pricing uses the prices of competing businesses as a foundation for adjusting prices.
In other words, this strategy doesn’t take into account customer demand when setting prices.
Competition-based pricing is typically used in highly saturated markets because even a small change in prices could be a key factor for most customers.
Static Pricing Strategies Often Face Challenges
Static pricing tactics rely on a set price point for an extended period of time. For instance, in retail, many companies use the “daily low price” strategy where items are offered at low rates.
The obvious problem is that if a company’s fixed costs increase, then profitability will decrease. The way to combat this is by increasing prices, which would push some customers away.
This pricing tactic relies on the incorrect assumption that companies, like eCommerce businesses, will always meet their target sales volume.
The overwhelming majority of eCommerce companies use dynamic pricing because they need to have strategic control over their sales.
Dynamic Pricing Software Tools
Companies that need to make strategic price changes require a fair amount of automation that algorithms offer. And yet, writing and managing algorithms requires a large amount of technical expertise, which is something that most business users lack.
In order to sidestep this problem, businesses have been implementing business rules engines. A business rules engine is a pluggable piece of software that runs robust “if-then” conditional statements called business rules.
These seemingly simple rules can express all the necessary pricing instructions that companies can use to successfully implement a dynamic pricing strategy.