The reality of our world is that the pricing for almost all products, services and experiences has already become, or is in the process of becoming, real-time and dynamic. Pricing algorithms are helping organizations maximize their revenue and identify the optimal price of a product or service.

Just like the devices we use, and the content and online experiences we consume, the pricing of services and products is also becoming more dynamic. It was previously used mainly by the travel and hospitality sectors but has now found use in many other sectors such as entertainment and retail.

Ways of using dynamic pricing

Dynamic pricing can be based on various factors, some of which are explained here. While dynamic pricing may not be a completely new concept, what’s new is that it is increasingly becoming automated, without the need of human intervention to modify the pricing.

1. Pricing based on timing

This type of pricing algorithm is prevalent in the hospitality industry. Hotel rooms and airline fares are cheaper when booked in advanced. This is because airlines and hotels benefit from early booking as it provides a more predictable business. Their customers are also benefitted because of the low prices. In this way, dynamic pricing serves to influence the behavior of customers.

1. Pricing based on availability

The principle that demand of goods increases their price and decreases their quantity is one of the basics of economics. Conversely, the price goes down once the supply becomes higher than demand. For example, taxi services such as Uber use a method called surge pricing. This method enables taxi drivers to charge more for journeys in an area where the demand is high. This attracts more taxi drivers to that area and hence, results in a shorter waiting periods for the customer. Retailers also use a similar method sometimes where they reduce the price of the last remaining items of a product that they have in stock.

1. Pricing to encourage conversion

Ecommerce websites sometimes offer additional incentives in the form of free shipping or other discounts in order to encourage customers to buy, if their browsing behavior indicates the sale to be at risk.

1. Competitive pricing

Online retailers in a highly competitive market such as consumer electronics, modify their prices continuously depending upon their customers. The consumers benefit from the low prices and retailers benefit from the high stock turnover and, thus, revenue. The offers in the B2B sector are often complex where pricing differs on how much a customer is already spending with the vendor, on the region, on the channels chosen etc. A dynamic pricing strategy not only increases consistency, but also transparency, accountability and trust. But dynamic pricing can become questionable when organizations stray from balancing supply and demand and combating competitors to just maximizing their revenue based on a customer’s willingness or capability to pay. The best practices to use dynamic prices are explained in the infographic below.

#BringItOn