How Does Dynamic Pricing Work?
Pricing strategy is an important part of running a business that directly affects inventory, sales, and profitability. If a company sets prices too high, customers will choose competitors' products, while low prices can result in lower revenues.
Dynamic pricing is a strategy in which product prices change based on supply and demand in real-time. The 24/7 monitoring, insight into consumer willingness to pay, and flexible pricing enabled by dynamic pricing can help a business increase its bottom line.
Let's look at some examples of dynamic pricing.
Airline services: not everyone can organize and plan their flights several months in advance. Therefore, many people have to book tickets at the last minute. Based on this, airfare prices change in minutes when using a time-based pricing strategy.
E-commerce: Many companies automatically adjust their prices based on competitors, market conditions, season, and marketing (new collection, seasonal demand, etc.).
Taxi Service: During snowy, rainy, or rush hour taxi services use dynamic pricing (price spikes) to capitalize on environmental conditions.
What about the disadvantages of dynamic pricing? Could it interfere with your business goals? We'll look at some of the advantages and disadvantages of using dynamic pricing.
The benefits of dynamic pricing.
Sales increase.
Dynamic pricing allows businesses to raise prices to capitalize on demand, and lower prices to get rid of old stocks.
Opportunity to learn more about clients.
Dynamic pricing allows you to analyze the demand curve for each customer. The process becomes simpler because the demand curve can more accurately represent what minimum and maximum prices customers are willing to pay for certain products. You can get more data on customer behavior using a dynamic pricing model.
High competitiveness.
Dynamic pricing can help you beat the competition easily. Thanks to dynamic pricing, you can tailor your customers buying preferences to provide a better experience but at a lower cost than your competitors' prices. This helps you attract a lot more than just customers - it helps to set leading positions in the market, even if there are many competitors.
Disadvantages of dynamic pricing.
Price wars
Dynamic pricing can trigger a price war. It will continue until one business reaches the point where it cannot sustain itself at the expense of an artificially low price. This is what many retailers fear when considering dynamic pricing.
Loss of customer confidence
Sometimes, when prices are constantly changing, it can irritate and frustrate customers. A business needs to build relationships with customers on a trust basis. If they cannot understand your unsustainable pricing strategy, you can face the problem of losing brand loyalty.
Negative customer experience
Buyers hate it when they find that someone else has paid much less for the same item they bought. Many companies using dynamic pricing may find customers demanding a refund if they find the same item much cheaper. There is a high probability that the consumer will have a negative customer experience that can greatly affect future sales.
This pricing strategy can cause serious problems if misused. At the same time, it is clear that it is capable of offering a huge range of business and client opportunities. The strategy is quite flexible and changes depending on the type of product, industries, market conditions, demand at certain times of the year, and, of course, the type of target audience.
This strategy has become very common in some industries. As time goes by, more and more businesses of all sizes and types are willing to try this method. Suppose you are running a business in which supply and demand significantly impact your product. In that case, dynamic pricing is likely the most effective strategy for ensuring a steady stream of sales.