Everything You Need To Know About Dynamic Pricing

Since 2015, dynamic pricing has so far been popular in the eCommerce sector, but it will take off in 2021. Well, it used to be a tactic that was exclusively available to certain sellers like Amazon. 

 

Today, there is a wide range of accessible services and technologies. As a result, this year's B2C enterprises will engage in an acceptance rate, with the early adopters likely to triumph over the opposition.

 

However, businesses using dynamic pricing have received criticism from customers in recent years. Although the drive for higher profit margins through price is commendable, many deployments lacked a few checks to make sure consumers and the company were prepared for such a dynamic and unpredictable move.

 

To prevent you from making the same mistake(s), let's examine what dynamic pricing entails, and then provide some strategies for making your price dynamic without suffering negative consequences.

 

 

What is Dynamic Pricing?

 

When a business or retailer regularly modifies its prices across the day, this is known as dynamic pricing. These pricing modifications have two objectives: first, businesses aim to maximise their profit margins; second, they want to promote profits.

 

In a pricing technique known as dynamic pricing, variable prices are used in place of set prices. Merchants may take advantage of the constantly shifting market by updating their prices numerous times each day rather than choosing a single price for the entire season.

 

Pricing that is dynamic and customized is frequently mistaken. However, these two alternative pricing models are very dissimilar from each other.

 

Also Read | Different Types of Pricing Strategies

 

Analytics Steps Explains Dynamic Pricing

 

In its simplest form, dynamic pricing refers to the idea of offering the same product at several price points in response to shifting market circumstances. Because of this, it is also known as time-based pricing, surge pricing, or real-time pricing.

 

Simply defined, dynamic pricing considers your items' relative worth compared to the rest of the market. On the other hand, personalized pricing assumes unique consumer behaviors and evaluates (and modifies) a product's worth depending on prior buying experiences.

 

With dynamic pricing, you may increase sales and profit from a shifting marketplace without jeopardising the privacy or confidence of your customers.

 

 

Types of Dynamic Pricing

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Types of Dynamic Pricing

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Businesses can use one or a variety of the following dynamic pricing types, depending on the needs of the industry:

 

1. Segmented Pricing

 

Businesses establish various prices for the same product based on client information (such as age, employment, geography, ordering channel, and desire to pay), which is sometimes referred to as findings of this study or predatory pricing. For instance:

 

• Since students become less likely to be working at the time of travel, airline tickets may be priced lower for them.

 

• Richer regions of the world where individuals can manage to acquire a thing can charge more for it.

 

• A product may be less expensive if you purchase it online as opposed to in person.

 

• A product with a coupon may be less expensive since those who utilize coupons are frequently sensitive to price increases.

 

2. Penetration Pricing

 

Whenever a new company hits the market or an established company seeks to lead the industry, the penetration pricing model is frequently utilised. Companies do this by providing cheaper pricing than their rivals. 

 

Of course, the cheap pricing won't last forever. Businesses gradually raise prices as demand and client base reaches a particular level.

 

The food delivery competition between UberEats and Deliveroo in the Belgian market is a prime illustration of this. To win over Deliveroo's clients during the epidemic, Uber Eats provided a 50% discount on the first five orders for six months.

 

Also Read | What are Debt Securities?

 

3. Time-based Pricing

 

There are many different use cases included in this pricing scheme. It is well-liked in sectors where customer demand for the goods or services fluctuates throughout the day. Or in situations when companies seek to provide incentives to encourage purchasing for various reasons.

 

Here are some quick examples:

 

• Different tariffs frequently have a large positive impact on the transportation industry. For instance, taxi night rates.

 

• eCommerce companies reduce the price of the previous collection with each new collection to get rid of the extra inventory.

 

• For same-day deliveries, several delivery services charge an additional fee.

 

 

4. Competitive Pricing

 

Pricing company commodities following the market and those of competitors is known as competitive pricing. According to a 2019 poll, the competitive price was cited by 70% of participants as the main reason they chose a certain online store. Prices may be determined by businesses:

 

• Prices that are higher than those of the competition are used to suggest that a good or service is superior.

 

• Lower than the pricing of competitors in the hopes that more buyers will buy their goods after comparing prices from other sellers.

 

• At a lower price to prevent loss. Businesses that set their pricing at the market rate typically sell their available in a variety of ways, establishing them apart from rival offerings.

 

 

5. Peak Pricing

 

Market information underlies peak price. It is comparable to time-based data in that firms set prices during periods of strong demand, but they also use competition data, such as inventory or availability. For instance:

 

• If an organization is aware that its rivals are out of supply, prices might be raised.

 

• Electricity providers may increase fees for power use during heat waves.

 

• When there are fewer drivers available, Uber occasionally sets higher pricing for rides.

 

 

6. Bulk Pricing

 

Delivering a cheaper price or a concession to clients who want to purchase a product in large quantities is known as bulk pricing. For illustration:

 

Retailers might provide a buy-2-get-1 deal to entice customers to purchase several units of a single item.

 

In comparison to purchasing each item separately, travel firms provide trip packages that include a flight, hotel stay, and rental car at a lesser cost. This strategy encourages customers to purchase a bundle of services rather than a single one.

 

Also Read | Marginal Benefit Vs Benefit Cost

 

 

Fairness of Dynamic Pricing

 

Since we, the customers, eventually decide whether to buy the goods or not, dynamic pricing should, in its truest form, be entirely acceptable to all of us. For us to make a purchase, the manufacturer must verify that the price offered aligns with our personalized market equilibrium using real-time pricing.

 

If you're unwilling to pay for the item, you'll depart and perhaps return when there's a promotion or a more affordable model. Your utility is satisfied if you are inclined to purchase the item, and you won't be aware that your friend paid less for it. Perfect pricing and market harmony are present.

 

 

How to Implement Dynamic Pricing?

 

You should be able to generate more money from some clients than others since not most of your consumers are the same. You only need to put them into practice correctly:

 

1. Price Discrimination: Two values are preferable to one.

 

Quantifying your consumer personalities and afterwards aligning your packages and price to those characters is one of the fundamental principles of pricing strategy. Your personas often aren't all comparable, and if they are, you're probably not understanding your personas correctly. 

 

Then, you may sell numerous variations of your product at lower and higher rates to generate variable revenue from clients of various sizes.

 

 

2. Make sure you use a suitable valuation metric.

 

Pricing across a value measure, whatever it is you're spending for in respect of a product, tends to be associated with premium offerings (per user, per GB, etc.). In the realm of software, you may divide your price up based on the number of users, the quantity of storage, the opinion of the public, etc., or a mix of several metrics. This is tough for a commercial product because you're paying for a tangible object.

 

Every consumer now pays you differently, which accounts for dynamism and results in less money having left on the table.

 

 

3. Use Time in a concept of market auctions

 

You may make sure your pricing changes based on time, much like how many sporting events and concerts handle ticket costs. This is something that airlines and travel agencies frequently do. There is no excuse why someone introducing a new gadget or a technology beta couldn't employ volatility in their price.

 

 

4. Discounts & bonus packs

 

We don't like discounts very much since they hurt your branding and sales revenue, but they may be utilized to subtly provide dynamic pricing to a select group of prospective consumers. 

 

According to recent research, over half the participants who follow businesses on social networking sites do so to take advantage of sales and other benefits.

 

Remember that you'll want to make sure the discount will not propagate with social items, although this is normally less likely than it would be with a general site that offers varied rates and is more accepted in society.

 

Also Read | What is a Vertical Marketing System?

 

 

What Ways Does AI Facilitate Dynamic Pricing?

 

Different AI/ML algorithms and analytics may be used by businesses to anticipate pricing in the following ways:

 

1. Market Opportunities

 

Web scrapers may be used to gather information about market trends from news websites, consumer reviews, rival blogs, industry publications, and surveys. AI algorithms that provide predictions for items to launch onto the market and predict pricing based on market trends can be fed marketing trend data. 

 

Systems of recommendations might be advantageous to companies that use penetration and aggressive pricing strategies.

 

2. Previous Data

 

Data from the past offers information on the goods and services that were popular at specific times. Using this information, one may forecast which items will be in high demand shortly and adjust prices appropriately. This is particularly helpful for peak and time-based charging.

 

3. Customer Conduct

 

By gathering information on search terms, purchasing patterns, preferred goods and services, user comments and reviews of specific goods, etc., it is possible to understand client behaviour. Businesses may use sentiment analysis with natural language processing to learn how consumers generally feel about a certain product, offering, or innovation.

 

Businesses may target clients with discounts, discounts, and advertisements in a data-driven way by analysing this data. Customer behaviour can help segmented pricing schemes be optimised.

 

 

Examples of Dynamic Pricing

 

Ride-sharing platforms, airlines, B&Bs and motels, as well as e-commerce businesses, are some of the most popular instances of dynamic pricing.

 

1. Hotels and B&Bs

 

Prices for hotels and bed & breakfasts vary according to the time of year, the season, and certain holidays, events, and other notable days. Dynamic pricing will help this sector earn more money. They occasionally employ the levers of urgency and availability to increase sales.

 

2. Services for sharing rides

 

Uber and Lyft are just two examples of ride-sharing businesses that frequently use dynamic pricing. In this sector, peak hours and weather-related situations like snow, rain, or storms determine rates (surge pricing) to reap additional gains. Similar methods are used by the food delivery sector.

 

3. Internet shops

 

Numerous online retailers change their pricing in response to a variety of internal and external reasons, such as the market rate, periods, rivals, and the start of the retail season or the debut of the latest collection.

 

4. Airlines

 

Although many people can typically book their tickets a few months before the event, business travelers frequently need to make last-minute flight reservations. As a result, airline ticket prices might alter within minutes.

 

 

Conclusion

 

Utilizing dynamic pricing helps you outperform your rivals. Using software for price optimization, you may keep tabs on your rivals instantaneously to assess trends and decide on any pricing adjustments they would like to undertake.

 

You have more control over your rates thanks to dynamic pricing. You may modify pricing in a matter of minutes with almost immediate consequences, as opposed to waiting to see if your goods and services are priced correctly. Because dynamic pricing includes the gathering and use of data to swiftly and intuitively alter prices, it can lead to significant savings.