Dynamic pricing, also known as real-time pricing, is a pricing strategy used to set prices for goods and services that are constantly changing in demand. Businesses can adjust their prices based on fluctuating market demand to gain a pricing advantage against competitors. If your competitors have a stagnant policy, they will miss out on pricing opportunities, such as raising prices when willingness to pay increases, or driving volume when it drops.
While the possibilities vary from industry to industry, here are the 4 main types of dynamic pricing strategies:
Type of Dynamic Pricing
1. Cost-Based Pricing
2. Competitor-Based Pricing
3. Value-Based Pricing
4. Time-Based Pricing
This form of dynamic pricing allows you to maximize returns based on time and capacity. Airlines use this type of dynamic pricing to set prices on tickets. For example, on holidays, airline tickets will be more expensive as market demand spikes.
3 questions when implementing dynamic pricing:
- What are our goals in pricing? Is the key to your business depend on being able to respond to volatile markets? Are changes happening hourly that require you to shift prices? If so, dynamic pricing may be right for you.
- How quickly can we implement pricing changes? Do you have the correct pricing systems in place to respond to dynamic changes? Are your customers able to adjust to the price changes? Even if you know your dynamic pricing goals, implementing them requires due diligence.
- What are our pricing indicators? What are your costs? What is the current market demand? What is your competitors’ pricing? These indicators all dictate your dynamic pricing capabilities.
Uber and eBay are great examples of companies maximizing their revenue using dynamic pricing:
- Uber utilizes time-based pricing, adjusting its prices during times of high and low traffic to provide customers transportation based on needs and demand.
- eBay utilizes value-based pricing, delivering products based on bids, and pricing their products based on their customer’s willingness to pay.
Unfortunately, most companies lack the competencies to consistently stay ahead of the rapid market changes, so their implemented benefits are short-lived
Bain & Company calculated that roughly only 18% of B2B companies’ prices dynamically
According to Statista Analytics, only about 21% of all e-commerce companies price dynamically
Most companies fail to price dynamically due to a lack of competence in 3 major fields:
- Data Acquisition and Analysis: Unusable/incorrect data can cause errors in pricing decisions, leading to substantial loss of time and resources.
- Process and Operating Models: Sophisticated dynamic pricing systems and infrastructure must be in place to collect, manage, and transform raw data into something comprehensible.
- Training and Communications: Your sales team must be enabled correctly, because if they cannot understand the pricing strategy and deliver it soundly, how can the customer?
The good news is only a small percentage of businesses have incorporated dynamic pricing. Read the above to gauge whether dynamic pricing is right for your business, and then ensure you do not fall into any common pitfalls. Reach out to Revenue Management Labs so we can help you learn more about your business’ pricing capabilities and how to quickly implement them to drive volume and maximize revenue.
ABOUT THE AUTHOR Avy Punwasee is a Partner at Revenue Management Labs. Revenue Management Labs help companies develop and execute practical solutions to maximize long-term revenue and profitability. Connect with Avy at [email protected]