Dynamic pricing

Dynamic pricing, also referred to as surge pricing or demand pricing, is a pricing strategy in which businesses set flexible prices for products or services based on current market demands.[1] Business are able to change prices based on algorithms that take into account competitor pricing, supply and demand, and other external factors in the market.[2] Dynamic pricing is a common practice in several industries such as hospitality, travel, entertainment, and retail. Each industry takes a slightly different approach to repricing based on its needs and the demand for the product.

Hospitality

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.[3] The goal of dynamic pricing in this industry is to find the highest price that consumers are willing to pay. Another name for dynamic pricing in the industry is demand pricing. This form of price discrimination is used to try to maximize revenue based on the willingness to pay of different market segments. It features 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 each 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.

Travel

Airlines change prices often depending on the day of the week, time of day, and number of days before the flight.[4] For airlines, dynamic pricing factors in different components such as: how many seats a flight has, departure time, and average cancellations on similar flights.[5]

Athletics

Sports ticketing is a segment of the entertainment industry that 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.[6]

Sports that are outdoors have to factor weather into pricing strategy, in addition to date of the game, date of purchase, and opponent.[7]

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.

Retail

Retailers, and online retailers in particular, adjust the price of their products according to competitors, time, traffic, conversion rates, and sales goals.[8] The aim of dynamic pricing is to increase revenue and profit. There are three basic ways to do this.

Amazon.com

The Amazon marketplace is very crowded with sellers. There, dynamic pricing means retailers can change the price of products immediately, intensifying competition.[9]

For over 3 million of retailers selling via Amazon Marketplace and jointly responsible for over $60 billion in annual sales volume, being featured at the top of the "Buy box" ( a detail on the purchase page that allows buyers to purchase products) at the highest possible price is the key. [10]

Pricing Based on Competitors

Businesses that want to price competitively will monitor their competitors’ prices and adjust accordingly. Amazon is a market leader in retail that changes prices often,[11] 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 during weekly office hours between 9AM-5PM.[12] Raising prices during the morning and afternoon and lowering prices during the evening is a common practice with dynamic pricing.

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.[13] 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.

On-demand services

Dynamic pricing is also practiced by on-demand services such as Uber, Lyft, and Sprig.[14] Uber's system for "dynamically adjusting prices for service" measures supply (Uber drivers) and demand (passengers hailing rides by use of smartphones), and prices fares accordingly.[15]

Conversion Rate Pricing

Conversion rates measure how many browsers on your website turn into buyers. When conversion rates of viewers to buyers is low, dropping the price to increase conversions is standard with a dynamic pricing strategy.

Future of Dynamic Pricing

More retailers are considering dynamic pricing,[16] 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, and it’s growing rapidly. Many believe dynamic pricing will become more relevant in the future of ecommerce.[17]

References

  1. ↑ "Dynamic Pricing definition". WhatIs.com. Retrieved April 1, 2014.
  2. ↑ Arie Shpanya (2014)"Why Dynamic Pricing is a Must for eCommerce Retailers"
  3. ↑ Tucker Cummings (2013) "Everything You Need to Know about Dynamic Pricing". Hospitality Net. Retrieved April 1, 2014.
  4. ↑ Dr. Gabor Forgacs (2010) "Revenue Management: Dynamic Pricing". WhatIs.com. Retrieved April 1, 2014.
  5. ↑ Dale Furtwengler (2011) "The Perils of Dynamic Pricing Lessons Learned from the Airline Industry". Retail Customer Experience. Retrieved April 1, 2014.
  6. ↑ Patrick Rishe (2012) "Dynamic Pricing: The Future of Ticket Pricing in Sports". Forbes. Retrieved April 1, 2014.
  7. ↑ Doug Williams (2012) "Dynamic pricing is new trend in ticket sales". ESPN. Retrieved April 1, 2014.
  8. ↑ Arie Shpanya (2013) "5 Trends To Anticipate In Dynamic Pricing". Retail Touch Points. Retrieved April 1, 2014.
  9. ↑ Arie Shpanya (2014)"Become King of the Jungle With the WiseGuy's Guide to Amazon"
  10. ↑ Paul Demery (2013) "Fighting for the Buy box on Amazon"
  11. ↑ Arie Shpanya (2013) "Do profits matter? The curious case of Amazon.com". Venturebeat. Retrieved April 18, 2014.
  12. ↑ http://business.time.com/2012/01/09/why-monday-is-e-retailers-favorite-day-of-the-week/
  13. ↑ "Toll Schedule for State-Owned Toll Bridges". Bay Area Toll Authority. Retrieved April 1, 2014.
  14. ↑ Valentine, Angelica (2015-02-05). "Uber vs Sprig: 2 Different Flavors of Dynamic Pricing". VentureBeat. Retrieved 2015-12-19. One of the longest standing complaints of users and journalists alike is [Uber's] use of dynamic pricing, or 'surge pricing.' Dynamic pricing often flies below the radar until something you want or need costs more than usual.
  15. ↑ Decker, Susan; Saitto, Serena (2014-12-19). "Uber Seeks to Patent Pricing Surges That Critics Call Gouging". Bloomberg L.P. Retrieved 2015-12-19. Uber applied for a U.S. patent last year for 'dynamically adjusting prices for service' using mobile devices. The system measures supply (Uber drivers) and demand (passengers hailing rides with smartphones), and prices fares accordingly.
  16. ↑ "Dynamic Pricing - Price Optimization, Competitive Pricing & Merchandising". LinkedIn. Retrieved April 29, 2014.
  17. ↑ Angelica Valentine (2014)"Why Automated Pricing Optimization is the Future of e-Commerce"

External links

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