PRICING BASED ON CONSUMER DEMAND
Consumer behavior and demand are constantly changing depending on various parameters, so there are demand-based pricing methods.
With demand-driven pricing, also called consumer-driven pricing, the seller adjusts the price of the product (often in real-time) according to customer demand and the perceived value of the product.
So what does the term mean?
The term demand-based pricing is really a broad approach to pricing that can include several strategies. What they have in common is that the price of a product is determined not by internal factors (for example, the cost of production), but by consumer demand. In particular, the seller tries to find the most acceptable price for his product at a certain point in time that a certain segment of customers will pay.
An example of demand-based pricing
The transportation and airline industries clearly demonstrate the practice of demand-driven pricing. We can see that airline tickets will be more expensive during the holiday season than on normal days.
Similarly, products such as air conditioners and air coolers become more expensive during the summer season compared to winter. Depending on the season, one type of clothing will receive more requests from customers than others.
The importance of demand-based pricing
Demand-based pricing is very important for price-sensitive industries. Demand-based pricing is a strategy that will help increase revenues for a company's growth. If an increase in demand for a product is not accompanied by an increase in revenue, it indicates a loss of opportunity for the company.
There are many areas where demand fluctuates greatly. This is where demand-based pricing will become extremely important.
Common demand-based pricing types.
Geographic Pricing.
This type of demand-based pricing is sometimes used as part of a broader geo-marketing strategy where company advertising, promotional activities, and prices change according to the geographic location of the consumer.
A seller using this type of pricing sets a high price for a product at launch and then gradually lowers it. The idea is that the first consumers will help the company recoup the costs of research, development, etc., and then slowly lower the price to attract a larger market share.
Profit Management.
Profit management is a valuable strategy that has several advantages. First, it can help you increase your margins in line with growing demand. Second, it can also help you maintain better customer service by increasing the likelihood that some of your standing inventory, such as airline tickets, will still be available as your flight date approaches.
Advantages and disadvantages of demand-based pricing.
Advantages:
- Demand-based pricing generates the most revenue from consumer demand. This type better meets customer needs by ensuring that the highest priority needs can be served.
- For products with a fixed inventory, demand-based pricing provides controllability to the system. It ensures that every customer receives quality service and all the benefits of the service or product.
Disadvantages:
- Demand is difficult to predict, even for established companies with a sufficient customer base. You can do extensive market research, but you can't foresee human action, demand can drop quickly.
- Demand-based pricing can only work with research, observation, and constant adjustment. Teams have to dedicate staff and time to research and collect data, which is time-consuming and resource-intensive.
One way to overcome the above challenges of demand-based pricing and determine if this strategy is right for your company is to automatically collect as much data as possible about your pricing, as well as research the pricing of your competitors. Our price monitoring platform, 7-Price, can help you do that. Get in touch and we will answer all your questions. We look forward to cooperating with you!