The pricing strategy of every company is key to its success. Successful companies need to pay for operational expenses while establishing competitive prices that generate revenue. Pricing policies are also determined by various external factors like customer demand, pricing of competitors, and market trends.
Defining Dynamic Pricing Strategy
Dynamic pricing is a strategy used by businesses across industries that regularly change prices based on predefined factors, sometimes in mere minutes. Basically, the point of a dynamic pricing strategy (or surge pricing as it’s sometimes called) is to give the same item or different prices at different times.
Dynamic pricing strategies are used in industries such as tourism, entertainment, e-commerce, and ride-sharing.
Surge Pricing Across Industries
Businesses change prices using algorithms that calculate customer demand and market prices in order to find the best rate.
Event managers use dynamic pricing algorithms to drive revenue and help create a feeling of scarcity so that customers fear missing out on attending an event.
Ride-sharing companies like Uber select prices based on the demand for rides. For instance, they increase the cost of fares when demand is high— holidays, during bad weather, and after concerts— to boost prices.
Today, most airline companies take into account things such as seat availability on a plane, departure date, seasonality, and the number of days before the flight to set a price.
Various Forms of Dynamic Pricing
Companies will use different factors to set the prices of items. Here are some of the most common tactics.
Companies use this popular tactic to increase prices more when providing expedited services; for example, when shoppers pay more for fast delivery.
Airlines use peak pricing in season or when frequent fliers want to buy the last seat for a popular destination.
Pricing Based on Competitors
This pricing tactic bases its prices on competitors; it takes the current market rate for the item.
Competition-based pricing is a common strategy in highly competitive industries because even a small price difference could be a crucial difference for most customers.
Benefits: Companies Become More Competitive
Dynamic pricing enables companies to beat the competition by changing prices in real-time. The ability to quickly switch your pricing policy in response to changing market conditions is a necessary step in buttressing a company’s place in the industry.
Implementing a Dynamic Pricing Strategy
In order to effectively implement a dynamic pricing strategy, companies need to use a software solution that enables team members to add all the relevant factors and information.
And most notably, adjust prices in the face of changing market conditions and circumstances. A software tool that is based on a business rules engine can, for example, analyze customer demand, inventory levels, and trends, in order to establish appropriate prices.
To make timely price changes companies need a certain level of algorithmic automation. Software solutions that are built on top of business rules engines are able to dynamically price their products and stay ahead of their competitors. Rules-based software tools are robust solutions that run powerful and transparent algorithms that execute pricing changes in real-time.