Dynamic Pricing

Updated on May 4, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Dynamic Pricing?

Dynamic pricing can be defined as a pricing strategy that ignores fixed pricing and applies variable pricing; 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.

Dynamic Pricing

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This function makes use of advanced data and considers traditional as well as modern factors. It is also known as real-time pricing, and it allows companies to frame pricing strategies based on the market within a very limited time and can settle very flexible costs. However, the approach depends on the type of industry.

Key Takeaways

  • Dynamic pricing is a pricing strategy that does not use set prices and instead uses variable prices; in other words, it is a strategy in which the cost of a given good tends to fluctuate in response to changing customer demand and supply.
  • This tactic frequently involves automation and uses cutting-edge data to adjust product prices on consumer behavior and willingness to pay. It helps merchants make the most money possible and eliminate their sluggish inventory.
  • Additionally, it aids in tracking consumer behavior and understanding the ever-evolving trends for merchants. It improves inventory management by enabling businesses to quickly and in real-time clear out their stockpiles.
  • After carefully considering these factors, the store can decide on the new price by studying consumer behavior and other factors that impact the demand for and supply of the goods. 

How Does Dynamic Pricing Work?

The dynamic pricing strategy refers to the pricing of goods and services that are variable and which depend on the market forces of demand and supply. Thus,  it is one of the pricing strategies in which the selling price of the company’s product is not fixed. Instead, it keeps changing based on its customer’s ongoing supply and demand of the product.

Dynamic pricing in retail is partially based on technology. partially based on technology. This strategy tends to be automated and uses advanced data to alter the prices of products as per customer behavior and their willingness to pay. It is highly useful in maximizing profits for the sellers and clearing out the slow-moving inventory.

Retailers that are more into e-commerce can use 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. After evaluating and noting these criteria, retailers 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 re-price their products.

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Types

The dynamic pricing strategy is of the following types.

Dynamic Pricing Types

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  1. Peak Pricing: Peak pricing is the alteration made in prices based on the current supply.
  2. Segmented Dynamic Pricing- The customer data is taken into use for altering prices.
  3. Customer Behavior: Customer behavior is the driving force behind the price change while using dynamic pricing tools.
  4. Competitor Pricing: The prices are altered based on the prices that the competitors offer.
  5. Time-Based Dynamic Pricing: The time factor plays the driving force behind the price change.
  6. 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.

Examples

Let us look at some examples to understand the concept:

Example #1

Dynamic Pricing Examples

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  1. Airlines: The price of the flight tickets in the airline industry depends on the remaining number of seats, type of seat, total time left for the flight to take off, etc. So, there is nothing as fixed pricing in this industry as different fare charges can be charged for tickets on a single flight.
  2. Electricity: In this type of industry, utilities might be charged at higher prices during high usage periods.
  3. Hotels: In this type of industry, the prices are generally altered on factors like the size of the rooms, peak season, festive season, weekends, type of view from the room, number of rooms available, and the total number of hours stay, etc.

Example#2

In the current market where price volatility is a serious phenomenon, firms are deploying a very targeted approach towards assessing consumer demands and competitor movements. Such a strict approach is due to the effect of inflation, which is reducing the profit margins. Thus the best way out is to use the dynamic pricing model to survive competition, price volatility, and inflation.

Advantages & Disadvantages

Advantages

The dynamic pricing model has some benefits as follows:

Disadvantages

It has some flaws too. Let us have a look:

  • Inventory Mismanagement: Rapid prices of a particular product can impact the demand and supply, ultimately making it difficult for the sellers to manage their inventory levels.
  • Confuses Customers: Dynamic pricing tools tend to confuse customers as there is a constant alteration in the prices of goods, and as a result of this, customers might prefer to purchase from 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 to communicate the price alterations to their buyers.

Dynamic Pricing Vs 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 retailers offer different prices to different customers for one particular product.
  • Basis: It is entirely based upon market conditions at a given time, whereas price discrimination is altogether based on customers’ characteristics.

Frequently Asked Questions (FAQs)

Where is the use of dynamic pricing?

The use of dynamic pricing is widespread in various sectors, including hospitality, tourism, entertainment, retail, energy, and public transportation. However, each industry employs a somewhat different dynamic pricing strategy based on its specific requirements and the level of demand for the product.

What advantages does dynamic pricing offer?

Businesses may quickly modify prices in reaction to variations in demand thanks to dynamic pricing. Therefore, it can assist firms in avoiding missed chances due to low prices or lost revenues due to high prices.

How do dynamic pricing tools work?

A dynamic pricing tool is a potent solution that makes pricing recommendations for your products based on guidelines and regulations. Set more competitive prices and specify the specifications for your products.

What distinguishes dynamic pricing from static pricing?

Static pricing: The cost does not change over time. Variable pricing is a price that changes daily but stays the same for any given day. Dynamic Pricing: Depending on the capabilities of the underlying e-commerce platform, prices change daily and then rise through several price points.

Recommended Articles

This article has been a guide to what is Dynamic Pricing. We explain it with examples, advantages, disadvantages, types, vs variable pricing & price discrimination. You can learn more about it from the following articles –

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