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How Dynamic Pricing Works

If you have ever booked a flight, you’ll know that when you book in relation to the flight’s departure can have a pretty significant impact on the price you pay (among other factors). What you might not know is that the ticket you end up paying for - whether it’s weeks or a few days before your flight - has been dynamically priced to generate profit and maintain the competitiveness of a given airline in particular market conditions. And, airlines aren’t the only ones doing this. This concept of offering different prices at different times (known as dynamic pricing) has been implemented by a growing number of companies - most effectively by Amazon - to attract customers and increase sales. So, how does dynamic pricing actually work?

Generally, dynamic pricing works by collecting lots of data, including:

  • Customer expectations and willingness to pay a given price

  • Competitor prices (including industry-specific standard pricing)

  • Company-specific goals for sales, revenue, and growth

  • Past, current, and future demand and supply (as well as past customer purchasing behaviour)

This data is then fed into dynamic pricing software (such as Remi’s dynamic pricing platform) that suggests optimal prices for products. This means that the computer does the hard work of collecting, storing, and sorting all of this data, and human oversight (generally in the form of the executive or a pricing team) ensures that the best price is actually implemented.

Now, let’s get into some of the specifics. Dynamic pricing can be broken down further based on how prices differ: that is, whether a product’s price changes by time or by group.


Who Sees What Price?

Dynamic pricing strategies that adjust prices based on time are pretty common. Whether a product has to sell by a certain time - such as the airline example above, hotel rooms and seasonal fashion - or is subject to time periods where demand regularly peaks - think everything from when you use electricity and public transport to when you buy a coffee - prices for these kinds of products can change quite frequently by small amounts, more dramatically less often, or a combination of both - with the goal of finding the right tension to ensure great revenue.

On the other hand, pricing a product by group means that a product is offered at a different price to different groups of customers. This can look like a simple (arbitrary) split of customers into two or more groups or a division based on customer information - such as demographics or willingness to pay a given price.

And, these strategies can be combined to deliver results too. On an everyday level, petrol is a great example of time-based and group-based pricing. While the price you pay depends on the availability and price of crude oil globally, it can also be dependent on when and where you choose to fill up. If you’re in a high-traffic area, you can generally expect to pay less than someone in a low-traffic area. And, petrol stations generally follow price cycles. This means that petrol stations choose particular days to heavily reduce prices to draw in customers - whether it’s a choice day of the week or at the start of a long weekend - and particular days where prices are highest, with a gradual change in between.

So, whether you mix and match strategies or pick one and stick with it, companies across industries - from Walmart and other mass retailers to online wine stores - have seen all kinds of success in staying ahead of the competition and optimising prices for their customers by implementing dynamic pricing.


Final Thoughts

When it comes to dynamic pricing, perhaps the biggest advantage is the automation of the manual (and tedious) task of setting the best prices for your product. And, dynamic pricing strategies can ensure that companies stay abreast of changes in demand and continue to be competitive in terms of price (which in turn leads to a boost in sales and profit).

And, even though different styles of dynamic pricing strategies come with their strengths and weaknesses, the key thing to remember is that a selected pricing strategy, whatever it happens to be, aligns with the goals and needs of a given company.

Want to find out more about dynamic pricing? Find out how to implement dynamic pricing in just four steps here, read on about how our dynamic pricing AI engine helped a US retailer with over 30 brick and mortar stores, or have a chat with us about our dynamic pricing platform here.


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