Love it or hate it, dynamic pricing is here to stay. Use it well to enhance revenue, profit margins and customer retention.
What Is Dynamic Pricing?
Dynamic pricing is a pricing strategy used to set the prices of products or services in response to market demand. It is also called surge pricing, time-based pricing, or demand pricing. Dynamic pricing has been used in the travel and hospitality industry for decades. We have all experienced it when booking flights or travel tickets. The same flight is priced differently based on the demand that usually peaks during the holiday season. Flights at odd times of day or night cost far less.
Automation of pricing has led to the adoption of dynamic pricing across many industries. Uber rides cost more depending on the demand at the time. Online shopping platforms also use automated dynamic pricing to offer deals and bargains to customers. Dynamic pricing, when done right, can help boost revenues and increase profitability.
So, how do you use dynamic pricing to your advantage? Here are seven key points:
- Set Goals And Start Simple
Identify the primary goal of your company. Define the dynamic pricing strategy of the company to reflect the company’s goal and image. If being perceived as high-end is essential to the company, ensure that the dynamic pricing keeps the price at the premium range. If being seen as a cost-competitive company is vital, the dynamic pricing will have to respond to competitors’ pricing. Plan your dynamic pricing strategy to achieve either long-term or short-term goals and targets in line with the company’s goals.
It may be tempting to dive into dynamic pricing head first. Too many new changes may confuse customers and be more challenging to implement. First, use a small selection of variables on limited products to compute the pricing. You can increase the complexity of the pricing rules as you gain more experience and data to work with. Often companies unknowingly train their customers on what to expect of them. Sudden changes become unwelcome. Customers will also react more favorably when the change is gradual.
- Offer Value
No two companies or products are alike. The value that each product or service offers the customer is unique. Dynamic pricing adjusts in accordance with the perceived value to the customer. Base your dynamic pricing on well-chosen variables so that the price does not erode the value that the product or service offers. When your pricing provides value for customers, they will stay loyal to you.
It is vital to choose the right pricing strategy to increase profits and retain customers. Technology allows you to calculate a price based on the individual customer’s preferences and profile. Use dynamic pricing software that allows you to set parameters that are relevant to the value of your product or service. When dynamic pricing strategies enhance the value that your customer derives, it reinforces customer satisfaction.
- The Right Dynamic Pricing Method Choices
There are three basic types of dynamic pricing:
- The first type is called price skimming. Companies often use price skimming when launching a new product at its highest price. Customers who see value in being the first to buy the latest offering happily pay the price.
- Price discrimination is the second type of dynamic pricing. Companies sell at reduced prices to bulk purchasers and wholesalers. Some companies also offer special deals to senior citizens and students.
- Yield management or revenue management is the third type of dynamic pricing that lowers prices significantly when there is low demand to attract new customers.
A company should use a combination of the different types of dynamic pricing to evolve a model that works best for their needs. It is essential to use dynamic pricing software that allows you to map out different strategies and handle overlaps intelligently.
- Avoid Customer Backlash
Dynamic pricing should be carefully implemented to ensure that there is minimal customer backlash. For example, special edition T-shirts can be priced based on the demand. However, a regular customer who returns to buy a plain T-shirt should not face a higher than expected price. A customer who will willingly pay a higher price for a holiday getaway ticket may not do so when buying his basic groceries. Certain products and services may do better when their prices are kept more stable or within a specific range.
When a company is transparent about its pricing strategies, customers are more accepting. Heavily fluctuating prices can frustrate customers. The seller should regularly review prices set by dynamic pricing software to ensure that they are not eroding customer trust and loyalty.
- Accurately Reflect Demand
It is pointless to change prices simply for the sake of it. Your demand pricing software should accurately and intelligently lower prices only when there is a significant change in the market. Needlessly fluctuating prices are a wasted exercise that may end up confusing customers. Select the metrics your demand pricing software uses so that the prices genuinely make a difference to your profits and the customer. Ensure that you are feeding the demand pricing software good data to get accurate pricing changes.
- Implement, Monitor, And Refine
An automated price monitoring tool does the price control job for you. But periodic reviews are essential to analyze if the pricing strategy is helping you meet your goals. You should ideally test and refine your pricing strategy with a pilot project. If necessary, go back to the drawing board until you get the pricing process working well. Regular reviews of customer feedback, sales data, and profit margins help you identify the dynamic pricing strategies working in your favor. Monitoring is also essential to prevent price wars that may cause unsustainably low prices that adversely impact profits.
- Use The Right Dynamic Pricing Software
The dynamic pricing software tool you use is as important as the price strategy. Dynamic pricing strategies can be based on many parameters and variables. An excellent dynamic pricing software should be able to monitor huge amounts of current as well as historical market data. The software’s variables should be relevant to your industry and company. Companies active in different locations, markets, and countries should be able to set, tweak and implement pricing algorithms across geographies.
Real-time insights and feedback are essential to refine and plan pricing strategies. A software tool with flexible and extensive reporting tools is vital to dynamic pricing. The tool should also be intuitive and easy to use by all the stakeholders in the company. Excellent software solutions that are difficult to use are bound to cause more problems than they solve. Choose a dynamic pricing software that is dynamic, viable, and easy to use in real-time.
When you use dynamic pricing strategically, it can help maximize revenue and stay competitive. Automation of the pricing process also saves time and money doing market research and making pricing decisions. The data that you obtain from dynamic pricing will inform you about the perceived value of your product. It also ensures a more steady sales flow and prevents painfully slow periods of low demand. Use the right dynamic pricing software tools and execute your dynamic pricing strategy to take your company to the next level.