A guide to implementing dynamic pricing at your business

Dynamic pricing is not an entirely new concept; some companies have been using it for years. The practice has long been a staple of the travel and hospitality industry and has become the norm for airline tickets, hotel rooms and ride-sharing services such as Uber and Lyft. E-commerce retailer Amazon has been a leader in using dynamic pricing strategy — it reprices millions of items repeatedly to align supply and demand.

But dynamic pricing isn’t just for travel companies or e-commerce giants, and it doesn’t necessarily require ultrasophisticated software that adjusts the product’s price multiple times a day. Even businesses in other industries, especially in this COVID-19 era, can reap tremendous benefits from these data-driven algorithms. 

The basics

What is it: Dynamic pricing is a strategy to price products based on a variety of factors, including market demand and supply, competition pricing and seasonality. The pricing strategy relies on algorithms to crunch data and recommend price changes for products and services at some level of frequency.  

A good dynamic pricing strategy allows businesses to reprice quickly (sometimes drastically) and at scale while remaining cognizant of the consequences of the change.

How it works: Dynamic pricing balances supply and demand to bring equilibrium to a market. This gives businesses the potential to offer a great user experience and boost revenues. 

For instance, Uber’s base fares are typically less than those for a taxi, but during the after-work rush hour, weekend nights or big events and festivals when demand spikes, the platform’s fares go up. People may have to pay a higher price, but they can always get a car when they need one — and more drivers show up in areas where demand is high because they know fares are better. As people leave and availability opens up again, the fares go back down.

Deploying a dynamic pricing strategy

As a foundational step, businesses should seek to understand their current competitive position in the market and consumers’ price perceptions of their brand. From there, they can assemble best-in-class data, infrastructure, tools and talent to build out their dynamic pricing capability.

Here are some keys to implementing dynamic pricing:

• Offer targeted discounting

Businesses can deploy dynamic pricing strategy as a lever to drive new customers. For example, companies can try to attract customers by directing targeted campaigns with limited-time offers or to eliminate inventory.

• Optimize price points

Machine learning lets businesses identify which consumers are willing to pay for which products at which price. For dynamic pricing to function as intended, businesses require a fundamental understanding of buying personas and which niches are willing to pay more. A high-runner marketing strategy can help businesses charge more for products that are doing well to recoup losses on a few losses they used to optimize volume.

• Improve pool margin

As the last few units are more valuable, they should not be priced the same as the first. Dynamic pricing can help maximize the value of a business’s portfolio of products and services by identifying the vital few units that can be sold at a higher price.

• Stabilize operations

Implementing dynamic pricing can enable operational efficiencies as well. When supply chains are disrupted by extraordinary events such as the COVID-19 pandemic, companies are positioned to deal with the turmoil by pivoting quickly to regulate backlog and capacity.

There is a tendency for businesses to overserve the least valuable customers to the detriment of the most valuable ones, and companies that fail to adjust their operations to pricing are likely to fall into this category. 

But those that have deployed dynamic pricing allow providers to redirect their resources efficiently.

• Test and innovate

Dynamic pricing allows businesses to A/B test (a user experience research methodology) their offers and consider a wider range of options, which at the same time drives innovation. 

In addition, dynamic pricing enables businesses to discover more about the perceived value of their products and services. The precision of this strategy also allows businesses to take more risks, because unprofitable offers can be immediately identified and eliminated.

• Maintain competitiveness

AI and machine learning are critical to implementing dynamic pricing, but they come with a big price tag. So, the practice can be a potential advantage for larger companies that can easily afford the price tag and have enough flexibility in their supply chain to manage its intricacies. 

Machine learning as service offerings and various other widgets are becoming more available, meaning e-commerce, retailers and other businesses can also consider opting for dynamic pricing approaches to manage their prices in real-time and outperform their peers.