Dynamic pricing, also called real-time pricing, is an approach to setting the cost for a product or service that is highly flexible. The goal of dynamic pricing is to allow a company that sells goods or services over the Internet to adjust prices on the fly in response to market demands.
Changes are controlled by pricing bots, which are software agents that gather data and use algorithms to adjust pricing according to business rules. Typically, the business rules take into account such things as the customer's location, the time of day, the day of the week, the level of demand and competitors' pricing. With the advent of big data and big data analytics, however, business rules for price adjustments can be made more granular. By collecting and analyzing data about a particular customer, a vendor can more accurately predict what price the customer is willing to pay and adjust prices accordingly.
Dynamic pricing is legal, and the general public has learned to accept dynamic pricing when purchasing airline tickets or reserving hotel rooms online. The approach, which is sometimes marketed as a personalization service, has been less successful with online retail vendors. Dynamic pricing can be contrasted with fixed pricing, an approach to setting the selling price for a product or service that does not fluctuate. Source Ref Tech Target
Hotels and other players in the hospitality industry use dynamic pricing to adjust the cost of rooms and packages based on the supply and demand needs at a particular moment. The goal of dynamic pricing in this industry is to find the best price that consumers are willing to pay. Another name for dynamic pricing in the industry is demand pricing and is a form of price discrimination, which is used to try to maximize revenue based on the willingness to pay of different market segments. They feature price increases when demand is high and decreases to stimulate demand when it is low. Having a variety of prices based on the demand at that point in the day makes it possible for hotels to generate more revenue by bringing in customers at the different price points they are willing to pay.
Airlines change prices often depending on the day of the week, time of day, and number of days before the flight. For airlines, dynamic pricing factors in different components such as: how many seats a flight has, departure time, and average cancellations on similar flights.
Sports ticketing is a segment of the entertainment industry that effectively uses real-time pricing to boost revenue. Dynamic pricing is particularly important in baseball because MLB teams play around twice as many games as some other sports and in much larger venues.
Sports that are outdoors have to factor weather into pricing strategy, in addition to date of the game, date of purchase, and opponent.
Ticket retailers have much more flexibility with dynamic pricing because tickets for a game during inclement weather will sell better at a lower price; conversely, when a team is on a winning streak, fans will be willing to pay more.
Retailers, and online retailers in particular, adjust the price of their products according to competitors, time, traffic, conversion rates, and sales goals. The aim of dynamic pricing is to increase revenue and profit. There are three basic ways to do this.
- First, retailers can use price intelligence to reprice based on the prices of their competitors.
- Second, retailers can drop prices when demand is low.
- Third, retailers can increase prices while demand is high.
Businesses that want to price competitively will monitor their competitors’ prices and adjust accordingly. Amazon is a market leader in retail that reprices often, which encourages other retailers to alter their prices to stay competitive. Competitor-based dynamic pricing can increase sales, especially if they take advantage when other retailers run out of stock.
Time Based Pricing
Many industries change prices depending on the time of day, especially online retailers, whose customers usually shop the most in the evening. Dropping prices during the morning and afternoon can be an effective way to increase sales during typically slow times of the day. Raising prices during the evening is a way to generate more revenue and profit because demand is highest then.
Transportation is another area where prices vary based on the time of day. The San Francisco Bay Bridge charges a higher toll during rush hour and on the weekend, when drivers are more likely to be travelling. This is an effective way to boost revenue when demand is high, while also managing demand since drivers unwilling to pay the premium will avoid those times. Dynamic pricing in transportation is also called peak-load pricing.
Conversion Rate Pricing
Pricing based on conversion rates is a way to turn window shoppers into buyers. When conversion rates of viewers to buyers is low, dropping the price can help turn it around.
Future of Dynamic Pricing
Dynamic pricing is becoming an important factor for retailers, as many have already adopted some form of it in order to counteract showrooming. The concept of dynamic pricing has been around for many years, particularly in the airline and hotel industries, but retail is one of the newer industries to adopt this pricing strategy. Nonetheless, adoption has accelerated recently as retailers have seen the impact on revenue and profits.
- "Dynamic Pricing definition". WhatIs.com. Retrieved April 1, 2014.
- Tucker Cummings (2013) "Everything You Need to Know about Dynamic Pricing". Hospitality Net. Retrieved April 1, 2014.
- Dr. Gabor Forgacs (2010) "Revenue Management: Dynamic Pricing". WhatIs.com. Retrieved April 1, 2014.
- Dale Furtwengler (2011) "The Perils of Dynamic Pricing Lessons Learned from the Airline Industry". Retail Customer Experience. Retrieved April 1, 2014.
- Patrick Rishe (2012) "Dynamic Pricing: The Future of Ticket Pricing in Sports". Forbes. Retrieved April 1, 2014.
- Doug Williams (2012) "Dynamic pricing is new trend in ticket sales". ESPN. Retrieved April 1, 2014.
- Arie Shpanya (2013) "5 Trends To Anticipate In Dynamic Pricing". Retail Touch Points. Retrieved April 1, 2014.
- Arie Shpanya (2013) "Do profits matter? The curious case of Amazon.com". Venturebeat. Retrieved April 18, 2014.
- "Toll Schedule for State-Owned Toll Bridges". Bay Area Toll Authority. Retrieved April 1, 2014.
- "Dynamic Pricing - Price Optimization, Competitive Pricing & Merchandising". LinkedIn. Retrieved April 29, 2014.