What Is a Dynamic Pricing Strategy?

While many businesses charge fixed prices, sometimes it makes sense to opt for a more variable pricing model that fluctuates with consumer demand. A dynamic pricing strategy responds to changes in competition and market forces. So, what is a dynamic pricing strategy, and does it make sense for your business? In this guide, we’ll discuss the advantages and pitfalls of this type of pricing model.

What is a dynamic pricing strategy?

The dynamic pricing strategy definition refers to automated price adjustment. In this pricing model, businesses automatically adjust their prices in response to real-time demand. When demand is high for certain items, the price rises accordingly. When demand is low, the price falls to entice more customers to make a purchase.

A dynamic pricing strategy is standard in many industries. Hotels, airlines, and ride-sharing services adjust their prices frequently. It’s also used in ecommerce, seen with big sites like Amazon that reprices its items by the minute. This pricing model is often data-driven. Dynamic pricing software uses machine learning and sophisticated algorithms to determine daily prices.

Dynamic pricing strategy examples

There are numerous dynamic pricing strategy examples across multiple industries.

• Airlines adjust their fares according to the number of seats that need to be sold each day. It’s usually far more expensive to purchase a seat at the last minute than far in advance.

• Hotels use a dynamic pricing strategy dictated by the seasons. During school holidays and peak travel times, rooms will be higher than during the off-season when they need to attract customers.

• Ride-sharing services like Uber and Lyft use surge pricing to charge more during times of high demand. They will charge higher rates during rush hour or on rainy days.

• Retail stores adjust prices depending on competitors, market penetration, seasonal supply and demand, and the need to attract more site visitors.

The pros and cons of a dynamic pricing strategy

There are several advantages of using this type of flexible pricing model, but it’s not always the right choice.

Dynamic pricing strategy pros:

• It helps you remain competitive by responding to real-time demand and market trends.

• It helps maximise revenue by increasing prices when customers are more likely to pay.

• Dynamic pricing software uses machine learning to save time on running your own models.

Dynamic pricing strategy cons:

• Responding to competitors can lead to an unsustainable drop in your own prices.

• Customers generally don’t like dynamic pricing if they consider it unfair, so high prices must be kept in check.

How to use dynamic pricing most effectively

If you decide to try this pricing model, there are several ways to make it more sustainable and effective. To get started, you’ll need to clearly define your business goals. Does dynamic pricing really fit with your brand? How will your customers respond to fluctuating, inconsistent prices? One option is to charge higher prices for a few products with high demand, while offering bargain prices for the rest of your inventory.

Another tip is to use dynamic pricing software. It’s difficult to monitor all market fluctuations and competitor pricing on your own. With artificial intelligence and machine learning, you’ll be better able to respond in real-time to market changes. Cloud software tests products at comparable stores and then uses its AI to make price suggestions. It’s up to you to choose whether to implement these suggestions.

Offering coupons or discounts to a select group of customers is also part of a dynamic pricing strategy. You’re reducing your prices for a subset, whether it’s new visitors to your website or a reward for loyal, returning customers.

Finally, find a payment and checkout process that can handle the flexibility of dynamic pricing. With GoCardless, merchants are in control of payment.  You can take the specified amount directly from customer bank accounts using BECS direct debit. We also integrate with over 300 partners to help you manage finances from a central dashboard, for full visibility over pricing and payments.

We can help

GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.