What is Dynamic Pricing? As the name suggests, dynamic pricing allows prices to be, indeed, dynamic. In other words, businesses do not set fixed prices for their products/services, but let prices vary depending on factors such as the customer’s purchase history, or the time of transaction, etc. The end goal of this approach is to personalize pricing and capture consumers’ maximum willingness-to-pay for a product.If that sounds like the pricing solution your business needs, you might find it helpful to take a look at the following core elements of dynamic pricing. They will help you gain a deeper understanding of how dynamic pricing works, and what you need to successfully implement this pricing strategy.
The core idea of dynamic pricing is actually similar to value-based pricing. That means, by figuring out how much value a product can bring to a customer, businesses can charge that customer an equivalent amount of money. In the past, getting to this level of personalization is very difficult, as there is no easy way to communicate different prices to different customers. With technology nowadays, it is possible for companies to track each individual’s buying habits and personal information, and then analyze data in order to generate individual customer specific prices or promotions.
2. Environmental Factors
Similar to other pricing strategies, dynamic pricing also needs to take into account environmental factors. Market trends, social movements, regulations, competitors’ performance can all affect customer demand, which ultimately will determine your product prices. Especially, when a product is commoditized and businesses have to compete on price, keeping a close watch on what competitors offer becomes even more crucial.
3. Customer Relationships
Knowing your customers’ shopping habits might allow you to work out a pricing formula that maximizes your profitability. However, do not forget that customer relationship is also an important part of any pricing strategy. Even though your customers can afford a higher price point, they will probably be upset if you just suddenly make a significant price rise without giving any reasonable justification. Also, depending how good your relationship with different customers, you might want to give them different rewards, such as a deeper discount for an older customer. Keeping in mind the importance those relationships in your pricing model is another essential step to ensure you can maximize the benefit of dynamic pricing.
4. Organisational Goals
When you develop any pricing strategy, you should always align it with your organisational goal. Different goals will lead to different pricing strategies. For example, if you want a high-end brand image, your product prices should be in the premium range; but if you want to be a cost-leader, you might need to have the lowest prices on the market. Similarly, a pricing strategy that maximizes a long-term profit might be different from one that maximizes a short-term revenue, or market share. Depending on what your organisation wants to achieve, there will be certain requirements that you need to incorporate into your pricing strategy.
While all of the elements mentioned above also apply to other pricing strategies, real-time data is the element that strictly belongs to dynamic pricing. The charm of the dynamic pricing model lies in the fact that it can 1) gather information, 2) process it, and 3) adjust prices, all automatically and in real-time. For example, when a customer is about to make a transaction, a dynamic pricing system might be able to check if that customer has ever purchased from the company before, process that information, and give that customer an individual promotion based on his/her past purchase. Or, a dynamic pricing system can access the amount of inventory a company has in real-time and automatically apply discount if necessary. While this process seems more evident in B2C setting, it holds true even for B2B. The only difference is that, instead of directly showing the price to end consumers in a B2C environment, a dynamic pricing system in a B2B environment will accompany and empower the company’s sales staff during the negotiation process.
6. Pricing Software
The last element that connects all other elements above and makes sure they work together as a coherent system is the pricing software. With so many pricing rules and variables, it is quite impossible for businesses not to rely on dedicated pricing software to work out the necessary optimisation algorithm. More specifically, since dynamic pricing involves the processing of real-time data, having a cloud-based system for instantaneous information retrieval and storage is also a must.
Thanks to the increasing sophistication of technology and the ubiquitous connectivity of the Internet, it is getting easier and easier for firms to implement a dynamic pricing system.