An essential ingredient for the perfect recipe of revenue management and pricing optimization.
Dynamic pricing, an interesting term with layers of profit for the business. Are you also a regular consumer of cab services like Ola, Uber, etc? If yes then you must have seen a sudden hike in cab charges due to multiple reasons such as unfavourable weather conditions or no availability of cab drivers. Do you enjoy the ease of having food delivered at your doorstep while you rest on your comfy bed? But sometimes, the high prices of your favourite food irritates you, right? In this article, we are going to provide you with an insight into the mechanism that works in the background of all this. Dynamic pricing is considered as the nucleus of business value.
Let’s start from scratch: what exactly is Dynamic Pricing?
Lexico powered by Oxford dictionary defines Dynamic Pricing as:
Simply put, dynamic pricing is a set of strategies employed by businesses for setting flexible prices of products or services based on current market demands.
Wanna know how dynamic pricing works?
Firstly, data is continuously captured and evaluated to adjust daily prices in light of the forecasted demand for that day. Data analysis is then performed to make informed pricing decisions. Machine learning algorithms apply advanced statistical techniques and econometric theory for data analysis. Dynamic pricing overcomes the limitations of fixed pricing models by continuously adjusting the prices for each tier based on changing market conditions.
Top 5 Industrial Sectors leveraging Dynamic Pricing
Dynamic pricing is now an inseparable part of most of the industries for a variety of reasons. Let’s see how.
E-Commerce
Dynamic pricing is one of the most important tools in the toolbox of e-commerce websites such as Myntra, Flipkart, Amazon, Snapdeal, and many more. They can target a specific section of customers, gaining an edge in this competitive world.
Hospitality
The tourism industry generates a larger portion of a country’s revenue and time-based dynamic pricing can be attributed to this growth. Higher prices are charged from the people during peak season.
Transportation
If you are a frequent air traveller then you probably know how airlines increase the ticket costs very often. They change prices depending upon several factors like: how many seats a flight has, departure time, number of cancellations in the last hour, etc.
Sports
Dynamic pricing is used in professional sports as well. For example, outdoor sports like cricket take many factors into consideration while deciding a ticket’s cost such as date of the game, date of purchase, opponent, and even weather.
Banking and Finance
In banking and finance, dynamic pricing is a different story: more of a utopia than reality with some nuances unique to the industry. Dynamic pricing can predict the individual relationship with the bank as an expression of the client relationship in financial services.
Common Dynamic Pricing Strategies
Following are some of the different data types used by retailers in dynamic pricing strategies:
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Competitor pricing: Businesses can keep track of the prices adopted by their opponents for the same product.
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Supply and demand based on locality: Prices can be adopted based on geographical features as well, resulting in classification by country, state, or city.
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Time-based dynamic pricing: Suppliers can offer an incentive to use a product at a certain time of day. Time-based pricing is very effective in the food industry.
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Cost-plus dynamic pricing: It is the most simple form of pricing including only internal charges, i.e. cost plus a predetermined amount of profit.
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Customer behaviour: E-commerce companies can manipulate prices based on how customers behave on their websites.
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Segmented dynamic pricing: Segmentation of customers into different groups such as based on income levels, can help to adjust product prices.
Dynamic Pricing is important for businesses today, but why?
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Quicker, more profitable sales
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Ability to adjust to competition pricing
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Improved flexibility
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Improved trend understanding
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Better inventory management
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Higher upsell conversion rates
Dynamic Pricing and COVID-19 Pandemic
COVID-19 has disrupted the supply of essential goods and services including public healthcare products. Hence, in response to surging demand, prices for these items have increased manifolds. Examples include N-95 masks, sanitizers, pulses, etc. What we believe is that government authorities should now intervene to regulate these price hikes to ensure the availability of basic amenities to the citizens.
Fixed Pricing is dead. Long live the Dynamic Pricing!
Dynamic pricing has received criticism in the past but implementation with a proper set of rules and regulations can help in revenue management and price optimization. We can deal with loopholes associated with dynamic pricing. In the end, it’s just a matter of awareness and strong decisions.
