Marketing

Pricing strategies: dynamic pricing

Your pricing strategy is the choice you make about how much to charge customers for your product or service

The decision you make about how much to charge clients for your goods or service is your pricing strategy. It is an important part of the marketing mix, and it must be consistent with the other aspects (product, place, and promotion) in order for the product or service to succeed in a competitive market.

Dynamic pricing is a pricing approach that allows you to adjust prices quickly in response to demand fluctuations.

When to use it

● To determine the price for a new product or service.
● To have a better understanding of your competitors' pricing strategies.
● To uncover new profit prospects for your company.
● To adjust your prices in reaction to demand fluctuations.

Origins

The first pricing research was done in microeconomics, and it was based on the fundamental idea that enterprises should choose the best price/output to maximize profit. These theories were gradually adapted to the realities of business. Firms might, for example, take advantage of varied levels of 'willingness to pay' from prospective clients by designing somewhat different items at different price ranges. Prices were also regarded as fluctuating over time, for example, if production costs decreased. The pricing strategies of competitors were also factored in, with game theory being used to forecast how they would react, say, if you raised your prices.

The earliest pricing research was founded on the core notion that businesses should find the best price/output to maximize profit. These theories were gradually adjusted to business realities. Firms might, for example, take advantage of differing levels of 'willingness to pay' from potential clients by designing slightly different things at different price points. Prices were also thought to fluctuate over time, such as if production costs fell. Competition's pricing methods were also taken into account, with game theory being utilized to predict how they would react if you raised your prices, for example.

What it is

Three large groups of factors influence your pricing approach. The first are the profit targets that your product/service is expected to meet; most businesses have a clear idea of what constitutes acceptable profitability. The second factor is client demand and willingness to pay in general. The third factor is competition: in an established market, your pricing approach is heavily influenced by present prices; in a new market, where there are no direct competitors, you plainly have significantly more pricing flexibility.

After considering these considerations, your pricing plan is a strategic decision that normally aims to maximize your long-term profitability. A variety of models are employed, with considerable differences between industries.

● Target-return pricing: setting the price to achieve a target return-on-investment is known as target-return pricing. This is widespread in well-known categories, such as most supermarket items.
● Cost-plus pricing: set the price at the manufacturing cost plus a predetermined profit margin with cost-plus pricing. Although this is becoming less widespread, it can still be found in some industries, like as government procurement.
● Value-based pricing: value-based pricing: Determine the price based on the customer's effective value in comparison to competing products. This is typical in new product sectors such as online games and written material, or a new smartphone brand.
● Psychological pricing: based on elements such as signals of product quality or prestige, or what the consumer perceives to be fair, use psychological pricing. This is how many high-end items are priced.

Dynamic pricing has evolved as a fifth model in the last 15 years. It's especially typical in marketplaces where the product is 'perishable' and the available capacity is set, such as airline seats, vacation reservations, and hotel rooms. And it's all thanks to the internet, which provides customers and suppliers with far more information than they previously had. You want to charge as much as possible in these marketplaces to fill up all of the available capacity. This is why half-term skiing vacations are twice as expensive as normal season vacations, and flight costs fluctuate on a daily basis.

How to use it

Here's an illustration of dynamic pricing in action. When booking a hotel room online, you'll notice that costs vary from day to day. The proper amount to charge for a room per night, according to the hotel, is what the consumer is willing to pay. They are losing money if the rate is too low, and they may be priced out of the market if the rate is too high. As a result, pricing fluctuations are the hotel's attempt to match supply and demand. When demand rises, prices rise; when demand falls, prices fall. As your hotel stay date approaches, the scenario becomes even more complicated, as the hotel realizes that it would rather sell an available room at a low price than leave it empty. You can sometimes get a great deal (since there is a lot of unsold demand) and sometimes pay a fortune if you book at the last minute (because there are only a few rooms left).

Dynamic pricing mechanisms used by businesses are complicated. They include a lot of data regarding previous demand levels, future demand estimates, competitor items and prices, and the volume of things you have available to offer over what time period. Typically, pricing modifications are implemented automatically by software agents known as pricing 'bots.'

Top practical tip

Understanding your customer's willingness to pay is the most critical factor in determining your price approach. It's simple to calculate the cost of your goods and use that knowledge to set your price. However, it is usually best to start by asking how much value your product provides to the customer and then move backwards from there. It is sometimes feasible to raise the perceived value of a product by charging a higher price (this works for luxury goods, for example).

The internet has made experimenting with alternative pricing methods and fast adjusting pricing in response to demand much easier. Amazon.com was a forerunner in dynamic book pricing, while low-cost airlines like Easyjet.com and Southwest Airlines were early adopters of dynamic pricing in their respective industries.

Top pitfall

Dynamic pricing has a few of clear drawbacks. One is that you don't want to get a reputation for slashing costs to ridiculously low levels when demand is low. Customers will find out what you're up to and postpone their purchases until the last minute. Many companies get around this difficulty by selling their cheapest items through a middleman in a disguised way: for example, if you book a hotel room through lastminute.com, you typically don't find out the name of the hotel until after you've booked it.

Another risk is that too much pricing variety might irritate clients, who may regard the differences as unfair and unclear, leading them to seek out other businesses. As a result, most dynamic pricing companies take care not to adjust their prices too much or too frequently.

Notion Templates

Get this high quality templates to help you with implemenation!

● Pricing strategy