Dynamic Pricing Definition
Dynamic pricing can be defined as a pricing strategy that ignores fixed pricing and applies variable pricing, or in other words, it is a strategy in which the price of a particular product tends to change as per the ongoing customers’ demand and supply and for this function, it makes use of advanced data and considers traditional as well as modern factors.
Explanation
It is a retail pricing strategy partially based upon technology. This strategy tends to be automated and makes use of advanced data for altering the prices of products as per the customer behavior and their willingness to pay. It is highly useful in maximizing profits for the sellers and clearing out the slow-moving inventory.
How Does Dynamic Pricing Work?
Retailers that are more into e-commerce can make use of technology and track consumers’ behavior efficiently by evaluating their purchase patterns over a particular period, demographic characteristics, etc. and draw effective decisions concerning fixing the pricing of a specific product. Retails after evaluating and noting down these criteria can set new prices for their products. Pricing products is easy, but re-pricing them becomes quite challenging. The users can make use of technology and accordingly track their customers’ behavior, and with the results ascertained, they can then after re-price their products.
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Examples of Dynamic Pricing
Examples of dynamic pricing are:
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- Airlines: The price of the flight tickets in the airline’s industry depends on the remaining number of seats, type of seat, total time left for the flight to take off, and so on. So, in this industry, there is nothing as fixed pricing as different types of fare charges can be charged for tickets in a single flight.
- Electricity: In this type of industry, during high usage periods, utilities might be charged at higher prices.
- Hotels: In this type of industry, the prices are generally altered upon factors like size of the rooms, peak season, festive season, weekends, type of view from the room, number of rooms available, the total number of hours of stay, etc.
Types
- Peak Pricing: Peak pricing is the alteration made in prices based on the current supply.
- Segmented Dynamic Pricing- In this, the customer data is taken into use for altering prices.
- Customer Behavior: Customer behavior is the driving force behind the change in prices.
- Competitor Pricing: The prices are altered based on the prices that are offered by the competitors.
- Time-Based Dynamic Pricing: Time factor plays the driving force behind the change in prices.
- Supply and demand Based on Locality: In this, prices are altered due to the demand and supply of the different types of products that tend to differ based on geographical reasons.
Importance
- It is crucial in today’s world, where change seems to be the only constant thing.
- It helps in generating quicker and more profitable sales for the retailers as it allows them to improve their sales conversion rates and ascertaining optimal pricing that can balance out profit marginsProfit MarginsProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more and conversion rates.
- It helps the retailers in getting adjusted to competitive pricing and improves flexibility by allowing them to target and achieve goals in their pre-determined pricing strategies.
- It also helps the retailers in understanding the ever-changing trends and track customer behavior and enhances their inventory management by allowing them to clear off their inventories easily and in real-time.
Differences Between Dynamic Pricing and Price Discrimination
- Prices Offered: This is a pricing strategy in which the same prices are offered to every customer, and this price keeps changing on account of various factors. On the other hand, price discrimination can be defined as a strategy where the retailers offer different prices to different customers for one particular product.
- Basis: It is entirely based upon market conditions at a particular given point of time, whereas price discrimination is altogether based upon customers’ characteristics.
Advantages
- Maximization of Profits: This helps the sellers in maximizing their profits by continually updating the prices of a particular product based on their customers’ behavior and such other factors.
- Speeds up the Momentum of the Inventory: It helps the sellers in clearing off their slow-moving inventory in real-time and even helps them in eliminating the excess of stock.
Disadvantages
- Inventory Mismanagement: Rapid alterations in prices of a particular product can impact the demand and supply of the same, which will ultimately make it difficult for the sellers to manage their inventory levels.
- Confuses Customers: Dynamic pricing strategy tends to confuse the customers as there is a constant alteration in the prices of goods and as a result of this, customers might prefer to purchase from such sellers that are not using dynamic pricing, and as a result of this, they might end up dealing with the loss of market share.
- Enhanced Marketing Activity: They might require the sellers to improve their marketing activities in the industry so that they can communicate the price alterations to their buyers.
Conclusion
- Thus the dynamic pricing is one of the pricing strategies in which the selling price of the product of the company is not fixed. Instead, it keeps changing based on the ongoing supply and demand of the product by its customer.
- For this retailer’s study behavior of the customers and another different factor that affects the demand and supply of the product, and after evaluating these criteria, they can make an informed decision with respect to the setting of the new price. This strategy is highly useful for the seller, as with this. They can be maximizing their profits and clear out the slow-moving inventory.
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