Dynamic Pricing: Meaning, Examples, Importance, And Implementation

An intelligence firm once revealed that Amazon changes its products’ prices more than 2.5 million times in a day. 

Dynamic pricing is when a business changes prices based on the product’s (or service’s) demand or supply. 

This guide covers the importance of dynamic pricing, its different types, and examples of businesses implementing it. 

Read on to implement a successful dynamic pricing strategy. 

The Basics of Dynamic Pricing

Dynamic pricing involves adjusting prices to match the product’s demand. For example, airline tickets are more expensive over the holidays and weekends because of their high demand. So airlines rake it during these times while providing the best experience to their customers.

It’s an automated process that relies on market data (e.g., how many people want the tickets), company data (e.g., how many seats are available), and machine learning (e.g., what time most people book a ticket) to set an appropriate price. 

Companies can adjust prices based on:

• Level of demand (e.g., hotels charge high prices when the demand for rooms is high, especially during the holiday season.)
• Competitors’ prices (e.g., fuel industry where different companies compete to have the best prices in the market.)
• Certain events (e.g., increasing the price of roses on Valentine’s Day or doing “Back to School sales”)

An eCommerce company, for example, can set up dynamic pricing software on their store to adjust prices to be the lowest at any moment. But of course, up to a minimum that makes sense for their profit margins. The software will monitor the competitor’s prices and adjust accordingly.

Here are dynamic pricing examples

Below are brands that use dynamic pricing strategies to build multi-billion businesses: 

Amazon

As I mentioned, a past analysis found that Amazon’s average product price changes every 10 minutes. The app uses dynamic pricing to match product prices to the cheapest competitors. So it tracks the competitor’s activities to predict how to make the most sales with the best profit margins. It also analyzes the inventory, customer shopping patterns, and profit margins before adjusting prices.  

Google Ads

Google Ads uses a bidding system where advertisers determine the price of a keyword. The most demanded keywords are the most expensive. 

The application’s dynamic pricing strategy depends on;

• The price that competitors are bidding for a keyword
• Industry/niche
• Target audience
• Location

Uber’s Surge Pricing

Uber rides are usually in high demand during rush hours. Once the app detects this, it increases prices for a few hours. So they make more money from customers willing to pay more. And at the same time, they make it worthwhile for riders to be available during rush hour. So customers will always find a ride no matter the time, day, or season. 

Types of Dynamic Pricing

Based on the data used to change prices, the most common dynamic pricing methods are:

• Time-based pricing: where prices change during certain periods – for example, Black Friday deals and end-month discounts;  
• Peak pricing: where companies increase prices during periods of peak demand. For example, Air BnB prices are higher during holidays; 
• Competitor-based pricing: where a company sets its prices lower than the competitors – e.g., Amazon’s strategy;

• Cost-plus pricing: where a company sets flexible prices based on the cost of the goods plus a markup;

• Value-based pricing: where prices change based on the customers’ perceived value – for example, a big part of Apple’s success is based on the value their customers believe they are getting. Hence, they are willing to pay more; 

• Conversion-rate pricing: where prices change based on website conversions – e.g., offer discounts when conversions are low.

• Segmentation pricing: setting different prices for the same product depending on the customer group, location, etc. 

• Penetration pricing: setting a discounted price initially to attract new customers

What is the difference between fixed and dynamic Pricing?

With dynamic pricing, you can increase or reduce the prices to meet the rise or decline in demand. On the contrary, fixed or static prices are consistent no matter the demand changes.

Why is dynamic pricing important for your business?

Dynamic pricing utilizes opportunities to make more profits. It also helps your business respond to consumer demands and changes in inventory. For instance, you can increase prices when the demand is high or the product is limited. 

Dynamic pricing increases sales and maximizes profit

Dynamic pricing programs automatically increase the price when the demand is high. And for that limited time (when demand is off the roof), they make more profits. For example, you can set up a program to increase your product’s price by x% whenever the demand is at y%. The program will track the market and adjust accordingly.

Implementing dynamic pricing also ensures that you set competitive prices. For instance, an eCommerce store can use pricing software like Netrivals to track competitors’ prices and lower their prices automatically.  Tracking the competitors’ prices ensures that they don’t underprice or overprice their offerings.

Finally, dynamic pricing data helps you understand your customers. How much are they willing to pay for your product’s value? This information is vital not only for your sales strategy but also for the marketing, branding, and product development teams. 

Dynamic pricing helps in managing your inventory

You can set lower prices for slow-moving products to get them rolling. At the same time, you can raise your prices for popular products to increase the demand for slow-moving items.

Conversely, you can discount popular items to increase their demand. 

But there’s a caveat:

Dynamic pricing works when prospects are willing to pay that amount. The average person does not want inconsistent prices; or, worse, ridiculously high prices. 

Recently, Bruce Springsteen’s fans were outraged by Ticketmaster’s dynamic pricing that increases ticket prices when demand is high. Springsteen’s tour tickets went as high as $5,500.