Dynamic pricing is a seemingly controversial strategy that has attracted praise and criticism in equal measure. On the praise end of the spectrum, it is used by companies looking to increase their profit margins. On the flip side, some consumers see it as an exploitative measure, a strategy to raid their pockets, a case in point being the 2015 price hike by Uber, a popular ride-hailing service, during the London tube strike. Uber was accused of increasing fares by over 300%.
That said, dynamic pricing is both advantageous and disadvantageous. Furthermore, when used appropriately, this strategy is unlikely to result in any backlash. But before discussing any of these aspects, let’s first understand what is dynamic pricing.
What is Dynamic Pricing?
At its core, dynamic pricing entails selling a product at different prices to different groups of consumers. Alternatively, the term also refers to the model whereby the seller sets a flexible price for a given commodity such that it adjusts according to the competitor prices, changes in demand and supply, and other market conditions.
With this definition, it is understandable why it is a form of price discrimination. At the same time, it details the possibility that a business may abuse the strategy by overly inflating an item’s price, citing a surge in demand. But this has the potential of damaging its reputation, meaning that although dynamic pricing offers companies leeway, there is a thin line beyond which this freedom becomes problematic.
Types of Dynamic Pricing
Companies can choose among these types of dynamic pricing strategies:
- Time-based pricing
- Peak pricing
- Market conditions
- Penetration pricing
- Segmented pricing
This dynamic pricing strategy entails discounting or reducing older products’ prices as new items are introduced into the market. It helps eliminate a surplus in stock.
A business using peak pricing increases the price during the high season or rush hour. It is based on increased demand and the understanding that the consumers have little time to decide lest another more willing buyer takes the item or their slot. A prime example of peak pricing is the low cost of hotel rooms during the off-season, which increases several times during the high season.
Of course, any business is impacted by changes in market conditions. For instance, if the sales begin to drop, the company adjusts the prices accordingly or runs a promotion to attract buyers.
Penetration pricing strategy is a form of undercutting because a company introducing a new product in the market sets an initially lower price than the market price. It subsequently increases this amount gradually once the consumers have known about the product and its demand is on the rise.
This strategy targets consumers located in different geographical areas or willing to pay more for the same product or service. For instance, an airline uses segmented pricing by offering various classes. Wealthy travelers and business people who can pay more have the option of purchasing first-class tickets. At the same time, individuals who just want to move from point A to B at the lowest price possible can buy economy tickets.
Benefits of Dynamic Pricing
Dynamic pricing strategy holds many benefits for companies, including:
- Boosting sales
- Increasing profits
- Creating higher demand for a product or service, hence enabling stock management
- Provides insight into consumer behavior
Disadvantages of Dynamic Pricing
The cons of dynamic pricing strategy include:
- Lost sales due to customer dissatisfaction
- Price discrimination, especially when the price is increased too much, for instance, during peak hours
- Monitoring competitors’ prices may present data extraction challenges
Nonetheless, all these disadvantages can be resolved. For instance, you can use automated web scraping to aid in price monitoring, thereby eliminating the need to manually check your competitors’ pricing strategies as this would be too time-consuming.
Also, you could choose to be open and transparent with your dynamic pricing strategy, as doing so will ensure that consumers are not caught unawares. Customers love transparency, and if they already know what to expect, they are unlikely to distrust your brand.
Lastly, overdoing dynamic pricing can only lead to disaster and accusations of exploitation, especially when the peak pricing model is used. Companies should avoid going overboard with price increases to ensure the dynamic pricing does not transition into price discrimination.
Implementing the dynamic pricing strategy for our business is a delicate balance between increasing profits or sales and doing so in a way that does not chase customers away. When done with complete disregard of consumers, it can easily turn disastrous. Nonetheless, its benefits make it a worthwhile addition to any company, provided it takes well-calculated steps to ensure its successful deployment. Also, relying on web scraping is a surefire way of guaranteeing that the pricing decisions are backed by market research and insight into competitors’ moves.