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What is dynamic pricing strategy?

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Last editedNov 20222 min read

Price isn’t everything in commerce but it is important. Some customers are price-sensitive. Most, if not all, are value-sensitive. In other words, they are sensitive about the relationship between quality and price. This means that it’s very important for businesses to use the right pricing strategy and to set prices at the right level.

What is dynamic pricing strategy?

Dynamic pricing strategy is the strategy of updating prices to reflect market conditions. It has probably existed since the days of bartering. In itself, it’s widely accepted by consumers. In fact, it can even be expected by consumers.

Advantages of dynamic pricing strategy

Ideally, a vendor’s price should exactly match a customer’s expectations. A customer’s expectations are likely to change according to market conditions. In some cases, this might be precisely because customers are so used to dynamic pricing. This means that it makes sense for vendors to update their pricing as consumer expectations change.

Dynamic pricing can also be used to influence customer behaviour. For example, if a vendor lowers the price of an item, people might be more encouraged to buy it quickly. If a vendor raises it, people might be more encouraged to try alternatives. This means that dynamic pricing can also be used to manage inventory, especially for physical items.

Disadvantages of dynamic pricing strategy

The main disadvantage of dynamic pricing is that it is more complex than static pricing. Modern technology has done a lot to ease the burden of implementing it. Very few retailers still go around their shelves putting individual prices on each item. Even small vendors now typically update prices from a centralised system.

Another potential disadvantage of dynamic pricing is that it can be perceived as exploitative. This is generally a reaction to it being done badly. The reason dynamic pricing is relatively easy to do badly is that it’s more complex than static pricing.

Dynamic pricing strategy examples

Here are some common dynamic pricing strategy examples and how they’ve been used in the real world.

Demand-based pricing

This is probably the dynamic pricing strategy with which consumers are most familiar. It’s used in just about every business sector to some extent. In some cases, it’s a reflection of consumer behaviour. For example, goods that are priced highly before Christmas often have their prices reduced afterwards.

In other cases, it’s a way to influence consumer behaviour. For example, transport companies routinely adjust fares in line with the seasons and even the times of the day. This helps to motivate people to travel outside of peak times if they can.

Modern consumers are likely to expect demand-based pricing, but it is vital to implement it respectfully. For example, if an emergency creates a surge in demand for a product or service, businesses should think carefully before increasing their prices. This may give the impression that they are exploiting the situation. If so, it could result in long-term reputational damage.

Freshness-based pricing

This could be seen as a subset of demand-based pricing, but it is distinct enough to warrant a mention on its own. Freshness-based pricing is standard in sectors where products and services are continually updated. Technology and fashion are probably the most obvious examples. It is also often used for perishable items such as food.

Customers who want access to the latest, greatest and freshest items pay the highest prices for this privilege. As the appeal of freshness wears off, the price is reduced.

Customised pricing

Given the trend toward increasing customisation, it might seem as if customised pricing would be the most exciting implementation of dynamic pricing strategy. In theory, this could be true. 

In practice, customised pricing can be very hard to implement. It involves tracking customer behaviour across browsing sessions. This can run foul of privacy laws. Even if it doesn’t, the use of shared devices can obscure the data.

Also, if potential customers become aware that you are using customised pricing, they can react very badly to it. A far safer option is to analyse customers’ purchasing histories and use them as the basis of product recommendations.

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