Dynamic Pricing Explained: Benefits, Strategies, and Examples

Dynamic pricing is one of the most interesting topics that has taken the eCommerce industry by storm. Even though it is not a completely new and unfamiliar concept for companies, it’s development is more related to new eCommerce trends. Having that in mind, there are some things that you should know in order to make the concept of dynamic pricing more understandable.

What is dynamic pricing?

Dynamic pricing, also referred to as surge pricing, demand pricing, or time-based pricing is a pricing strategy in which businesses set flexible prices for products or services based on current market demands. To put it more simply, this is a strategy in which product prices continuously adjust — it may be in a matter of minutes, hours or days, depending on the type of the market.

If we go a little bit back in time, we can see that the questions such as how many people want some product, how much product is there in stock, how much product varieties exist, how many competitors are out there, etc. have always captured the companies attention. Nowadays, dynamic pricing uses more advanced data and ways to make this process faster.

Main benefits of dynamic pricing

In today’s eCommerce dynamic pricing became one of the most important tools to work with and for several reasons. One of them is making more quicker but at the same time more profitable changes in terms of sales. Using the data that you have available for dynamic price optimization allows you to improve conversion rates.

Also, this way your business becomes more aware of market changes and can act with much more flexibility. For example, if some item is overstocked, the necessary reduction can be performed by offering discounts.

Of course, price optimization offers you a possibility to track and adjust the prices to your competitors. Another benefit is also having a better insight into industry trends. You would be able to understand which items are most bestselling, by which competitors and by what price.

What types of dynamic pricing exist?

Dynamic price optimization can appear in a few forms, where each of them can be used for achieving different goals.

Segmented pricing: This strategy offers different prices for different customers, which means that the customers are divided into segments. For example, high-value customers can be offered higher prices because we can assume that they might put service speed and quality over the price.

Time-based pricing: Companies can use this pricing method when they want to charge more for providing some faster services. This means that you are going to pay more if you want to have same-day service, or if you reached the company close to the end of the working hours.

Changing market conditions: As you are aware, the situation on the market can change due to various factors and businesses must act accordingly. If for some reason sales begin to fall, the company will go for the strategy of lower prices.

Peak pricing: This strategy can be used by many industries to charge more during the peaking hours.

Penetration pricing: Penetration pricing strategy is used when businesses want to reach a large portion of the market so that the possible future customers get familiar with the product or service that they offer. In order to do so, companies set prices that are below the market prices and tend to increase them gradually.

Would dynamic pricing work for you?

There are some things that you can do to make dynamic pricing work for you. In the first place comes the transparency towards customers regarding your prices. Customers must always be informed about the factors on which the price depends. Another useful way of implementing this strategy would be through motivation some of the customer’s behavior. For example, peak pricing helps widen profits during peak hours.

Some of the largest digital retailers in the world, such as Amazon, have implemented dynamic pricing and enjoyed huge benefits. However, some industries use this strategy all the time and in a very successful way. Maybe the best representative example would be airfare pricing.

What makes the airfare so prone to price variations? First of all, airline companies are aware of different types of passengers. They can be roughly divided into leisure and business travelers. Both of them need this service, but their behavior is quite different. While the leisure traveler is (generally) more flexible with dates (meaning that they tend to plan their trips), business travelers have to travel on a certain day and often at a certain time. This means that leisure traveler tends to book tickets in advance, whereas the business one is often obliged to make some last-minute reservations, willing to pay more. So, as we get closer to the departure date, the only seats available are the more expensive ones. Also, there are some dates during the year when the demand is always higher — holidays for example. Airfare prices can vary also depending on the day or on the airline company.

Things to avoid in dynamic pricing

Based on all the above, it might seem that this strategy has no week points. However, if not used carefully, dynamic pricing may very easily become a double edge sword. Even though is used for comparing and monitoring prices on the market, it must never be used as a tool for price discrimination.

Some companies, such as Uber, had to learn that in a hard way. As Uber operates as a low-cost ride service, the decisions of raising the price during rush hour, or after some big events, were met with serious public criticism. To make the situation even worse, Uber started implementing this method during a snowstorm in New York, which resulted in Uber being accused of exploiting its customers.

How to implement dynamic pricing?

So far you become somewhat familiar with the concept of dynamic pricing and it’s pros and cons, but what comes now as a logical question is how to implement dynamic pricing into your business?

Whit so many competitors in the market it’s getting harder and harder to keep up, but it can be managed effectively with using the right software. Monitoring hundreds of thousands of different products is an extremely challenging task, beyond the scope of most eCommerce businesses. One of the solutions that can help retailers to overcome this task is offered by Price2Spy software which you can see in action if you start your 30-day free trial.

While dynamic pricing can cause some serious problems if it is not used properly, at the same time it’s clear that it offers a huge specter of possibilities for businesses and customers as well. In dynamic pricing, as we have seen, the price is not firmly set. It changes depending on the type of product, industries, market conditions, demand on certain year time and of course, on the type of customer being targeted. This strategy became very common in some industries, and as time goes by, there are more and more industries of all sizes and types willing to try this method. Also, with increased competition in the eCommerce market, retailers are faced with the tough challenge of maximizing profits while keeping their prices competitive. This is also the situation where dynamic pricing comes as an ideal solution.

What are your thoughts on dynamic pricing? Let us know, we’d be happy to hear from you!