Dynamic Pricing Definition Example How Does It Work

Dynamic Pricing Definition

Explanation

It is a retail pricing strategy partially based on technology. This strategy tends to be automated and uses advanced data to alter the prices of products as per the customer behavior and their willingness to pay. It is highly useful in maximizing profits for the sellers and clearing out the slow-moving inventory.

How Does Dynamic Pricing Work?

Retailers that are more into e-commerce can use technology and track consumers’ behavior efficiently by evaluating their purchase patterns over a particular period, demographic characteristics, etc. and draw effective decisions concerning fixing the pricing of a specific product. After evaluating and noting these criteria, retailers can set new prices for their products. Pricing products is easy, but re-pricing them becomes quite challenging. The users can make use of technology and accordingly track their customers’ behavior, and with the results ascertained, they can then re-price their products.

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Examples of Dynamic Pricing

Examples of dynamic pricing are:

Airlines: The price of the flight tickets in the airline industry depends on the remaining number of seats, type of seat, total time left for the flight to take off, etc. So, there is nothing as fixed pricing in this industry as different fare charges can be charged for tickets on a single flight.Electricity: In this type of industry, utilities might be charged at higher prices during high usage periods.Hotels: In this type of industry, the prices are generally altered on factors like the size of the rooms, peak season, festive season, weekends, type of view from the room, number of rooms available, and the total number of hours stay, etc.

Types

Peak Pricing: Peak pricing is the alteration made in prices based on the current supply.Segmented Dynamic Pricing- The customer data is taken into use for altering prices.Customer Behavior: Customer behavior is the driving force behind the price change.Competitor Pricing: The prices are altered based on the prices that the competitors offer.Time-Based Dynamic Pricing: The time factor plays the driving force behind the price change.Supply and demand Based on Locality: In this, prices are altered due to the demand and supply of the different types of products that tend to differ based on geographical reasons.

Importance

It is crucial in today’s world, where change seems the only constant.It helps generate quicker and more profitable sales for the retailers as it allows them to improve their sales conversion rates and ascertain optimal pricing that can balance out profit marginsProfit MarginsProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more and conversion rates.It helps the retailers adjust to competitive pricing and improves flexibility by allowing them to target and achieve goals in their predetermined pricing strategies.It also helps retailers understand the ever-changing trends and track customer behavior. It enhances their inventory managementInventory ManagementInventory management in business refers to managing order processing, manufacturing, storage, and selling raw materials and finished goods. It ensures the right type of goods reach the right place in the right quantity at the right time and at the right price. Thus, it maintains the product availability at warehouses, retailers, and distributors.read more by allowing them to clear off their inventories easily and in real-time.

Differences Between Dynamic Pricing and Price Discrimination

Prices Offered: This is a pricing strategy in which the same prices are offered to every customer, and this price keeps changing on account of various factors. On the other hand, price discrimination can be defined as a strategy where the retailers offer different prices to different customers for one particular product.Basis: It is entirely based upon market conditions at a given time, whereas price discrimination is altogether based on customers’ characteristics.

Advantages

Maximization of Profits: This helps the sellers maximize their profits by continually updating the prices of a particular product based on their customers’ behavior and other factors.Speeds up the Momentum of the Inventory: It helps the sellers clear off their slow-moving inventory in real-time and even helps them eliminate the excess stock.

Disadvantages

Inventory Mismanagement: Rapid alterations in prices of a particular product can impact the demand and supply, which will ultimately make it difficult for the sellers to manage their inventory levels.Confuses Customers: Dynamic pricing strategy tends to confuse the customers as there is a constant alteration in the prices of goods, and as a result of this, customers might prefer to purchase from sellers that are not using dynamic pricing, and as a result of this, they might end up dealing with the loss of market share.Enhanced Marketing Activity: They might require the sellers to improve their marketing activities in the industry to communicate the price alterations to their buyers.

Conclusion

Thus, dynamic pricing is one of the pricing strategies in which the selling price of the company’s product is not fixed. Instead, it keeps changing based on its customer’s ongoing supply and demand of the product.For this retailer’s study behavior of the customers and another different factor that affects the demand and supply of the product, and after evaluating these criteria, they can make an informed decision concerning the setting of the new price. This strategy is highly useful for the seller, as with this. They can maximize their profits and clear out the slow-moving inventory.