What is Dynamic Pricing? A Practical Guide to Business Profitability

Dynamic pricing is a way of changing your business’s prices in response to supply and demand. You may know this type of pricing as demand pricing, surge pricing, or time-based pricing.

As a business owner, using dynamic pricing can work to your benefit. Price changes that increase when there is high demand can lead to better profits, and lower prices during times of low demand can help you keep product moving even when competitors’ static prices cause their inventories to come to a standstill.

This practical guide provides more information on dynamic pricing, how it works, and when it’s appropriate to determine if your business should use it.

What is dynamic pricing?

Dynamic pricing changes during special events, with supply and demand, and based on other factors. A good example of dynamic pricing is if you think about the airline industry. When there are many seats available on a flight, they stay affordable. But as seats fill up, they start to increase in price, too. They also get more expensive as you approach the date of the flight, which encourages people to book their flights early. On the other hand, if a plane stays empty and needs more bookings? A coupon may go out as a part of a marketing burst to fill seats and make the company more money.

How does dynamic pricing work?

How dynamic pricing works depends on the company, but it is usually determined using algorithms and data analysis. By analyzing demand and other factors, such as the maximum price consumers are likely to pay, it’s possible to come up with appropriate pricing for products and services at any time.

Some of the data used to set dynamic rates include current market trends, weather data, competitor pricing, supply and demand, and historical sales data. With this kind of data, it’s possible to change pricing in real time or even set it to change ahead of specific dates or times.

5 Benefits of Dynamic Pricing

Using dynamic pricing lends itself to several key benefits. Some of the benefits your business may get out of dynamic pricing include:

Increased Revenue

One of the top reasons to use dynamic pricing is because you can increase your revenue from the same products or services you offer today. While competitors may offer the same price all year, the ebb and flow of your prices could help you better meet supply and demand to bring in more leads and sales.

Improved Supply and Demand Balance

Sometimes, supply is greater than demand. Other times, it’s the opposite. In either case, using dynamic pricing allows you to meet your customers in the middle, ensuring they are paying a fair price based on the market condition. For example, if there are 400 people needing rides and only 20 Ubers in the area, using surge pricing to meet the demand encourages more drivers to get online and drive while simultaneously ensuring they’re being paid more for their services during peak times when demand is high.

Enhanced Market Adaptability

With dynamic pricing, you get to adjust your prices quickly and respond to changes in supply and demand. When you do this, you can take advantage of times when your sales can bring you more revenue. You can also take advantage of times when other competitors with static prices may not get many sales due to cost. For instance, if your competitor is selling T-shirts at a standard rate of $20 all year but you reduce the price to $15 in the winter, you may make more T-shirt sales in the winter when demand is lower and consumers are more likely to look for deals.

Boosted Sales

Adapting your prices to suit demand can mean you get more sales. Using the T-shirt example above, consider this: If you keep your prices high, consumers may not decide to purchase your product at times when those products aren’t necessary. But if you are selling items or offering services for less when there isn’t much demand, they may see your business as one with a great deal—one they want to take advantage of.

Reduced Costs

With dynamic pricing, you can save your business money, as well. For instance, if you maintain your own inventory, you can always order the same amount and simply adjust your pricing to suit the availability of the products people want most. If demand for certain items is low, you can decrease your prices to move those products and make room for better-selling items.

3 Cons of Dynamic Pricing

While there are many benefits to implementing dynamic pricing, there are also some downsides of which you should be aware. Some of them include:

Customer Backlash and Distrust

Customer backlash and distrust are possible when your product pricing is constantly on the move. Some customers may see surge pricing as a form of price gouging, which can reflect on your business negatively.

Potential for Errors

With dynamic pricing, there is a risk that errors could occur and cost your business money. Errors can occur if data is misunderstood or an algorithm is faulty, so be sure you’re double-checking the information before adjusting your prices. And, don’t forget to remove coupon codes or discount codes if you decide to bump prices back up. Failing to do so could reduce your revenue substantially.

Risk of Losing Customers

There is a real risk of losing customers if you create circumstances where it seems like you price gouge or use price discrimination to make more money. Ensure that your dynamic pricing is reasonable and within the limits of what competitors offer, too, so you are in line with industry standards and less likely to offend your customer base.

3 Types of Dynamic Pricing

Dynamic pricing might seem straightforward on the surface, but there are several types you’ll need to know if you want to use it effectively. Taking advantage of the right kind of dynamic pricing will help you beat out competitors and adjust prices to make the most of your inventory.

Here are three common types of dynamic pricing that you may want to implement in your brand’s pricing strategy:

Dynamic Pricing Based on Groups

Group-based dynamic pricing is designed to increase or decrease prices among certain groups. A good example of this is decreasing the price of a service or product for those in the military or those over 65. Generally, this is the type of dynamic pricing used for discounts, but you could also increase prices among certain groups if you do so carefully. If you make a mistake or price gouge, you could be accused of price discrimination.

Dynamic Pricing Based on Time

Dynamic pricing based on time is another option you could use. It’s common to change your prices at certain times of the year, for example. Or, you might change your prices throughout the day if you want to run an hour-long sale or a short promotion.

Dynamic Pricing Based on Competitors

A third type of dynamic pricing is changing your pricing based on what your competitors are currently offering. You can implement a price change on a product or service to slightly undercut a competitor, for example, which allows you to capture those looking for a more affordable alternative to what your competitor has to offer.

How To Implement Dynamic Pricing: 3 Strategies

There are several strategies you can use to make the most of a dynamic pricing strategy. They include but are not limited to:

Price Differentiation

The first strategy to consider is price differentiation. This kind of dynamic pricing requires you to change the price of the same products or services based on a client’s preferences. A good example of this is charging more or less for a service based on where the client’s home is. Price differentiation also includes things like bundling items to decrease the cost of specific items or changing the price of items as the consumer gets older (such as with a senior discount).

Keep in mind that you should meet any local or federal regulations with this kind of dynamic pricing. You don’t want to be accused of price discrimination by increasing your rates or product pricing for only certain groups.

Couponing and Discounts

Couponing and discounts are great for dynamic pricing strategies because they allow you to keep your products or services priced at your highest preferred rate and discount them (or send out coupons for them) if and when needed. So, it’s possible to offer volume discounts, location-based discounts, or other kinds of personalized discounts if you use this method when you set your prices.

One nice thing about this method is that it’s easy to implement, and you can always keep product prices higher for those who are ready to buy, no questions asked.

Time-Based Pricing Model

A time-based pricing model is another option you may want to consider. Time-based pricing works well because there will always be an ebb and flow with supply and demand. For example, if you sell red and green T-shirts, it would make sense to see an uptick in demand around the Christmas holiday. Red shirts might also be in higher demand in July.

Knowing that demand may increase, you could increase your prices near July and December to accommodate the demand for your products. You could also decide to discount those products at that time but keep them at a higher price throughout the year if you want to move large quantities of items versus selling fewer items at a higher rate.

2 Dynamic Pricing Examples

Many companies have successfully implemented the use of dynamic pricing. Two of them, Uber and Amazon, have it down to a science:

Uber

Uber is a company well-known for its use of a dynamic pricing model. The ridesharing service often increases prices to surge rates when there is high demand for rides, such as if a local area has a major event on a specific night.

Typically, the cost of a ride on the Uber app will increase when there are fewer drivers and more potential riders. To get the best rates, riders generally need to wait for times when many drivers are working and few riders are looking to take an Uber.

Amazon

Although Amazon doesn’t specifically talk about its pricing strategy, most consumers can agree that the prices on the website change rapidly. There are often coupons and discounts added to the site, so an item that costs $100 today might only be $55 tomorrow.

Amazon uses dynamic pricing to adjust to real-time demand, its own stock levels, and how users interact with certain buyers or the site itself. For example, Halloween items are typically cheap on the website, particularly at times of the year when costumes aren’t in demand. However, as October approaches, you’ll start to notice fewer sales on those items and may see the prices staying stable at their normal rates. After a holiday event is over, related items generally get discounted again.

Amazon also runs short, time-bound events to encourage consumers to buy within a specified time frame. This approach creates a sense of urgency that leads people to buy, increasing Amazon’s Revenue.

Podium Helps Your Company Manage Pricing With Strong Feedback

Using dynamic pricing can be an amazing way to bring in more revenue, but retailers have to be careful not to swing prices too much or cause consumers to become wary. That’s where Podium’s AI Employee can be a great help. With Podium’s AI Employee, you’re able to communicate with leads and convert them to customers around the clock. And, if they have a problem or concern with your pricing, the AI can respond right away.

Paired with Podium Reviews, you get the deeper support and insight you need to make more sales. In fact, Podium Reviews can double your Google reviews and help you get more five-star ratings, which builds trust with your audience and lets you get feedback about what customers think of your prices. Win, win.

Ready to see how Podium can help you strategize for business success and manage your leads? Watch a demo.