Dynamic pricing

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Lua error in package.lua at line 80: module 'strict' not found. Dynamic pricing is a pricing strategy in which businesses set flexible prices for products or services based on current market demands.[1] Business are able to change prices based on algorithms that take into account competitor pricing, supply and demand, and other external factors in the market.[2] Dynamic pricing is a common practice in several industries such as hospitality, travel, entertainment, and retail. Each industry takes a slightly different approach to repricing based on its needs and the demand for the product.

Hospitality

Hotels and other players in the hospitality industry use dynamic pricing to adjust the cost of rooms and packages based on the supply and demand needs at a particular moment.[3] The goal of dynamic pricing in this industry is to find the highest price that consumers are willing to pay. Another name for dynamic pricing in the industry is demand pricing. This form of price discrimination is used to try to maximize revenue based on the willingness to pay of different market segments. It features price increases when demand is high and decreases to stimulate demand when it is low. Having a variety of prices based on the demand at each point in the day makes it possible for hotels to generate more revenue by bringing in customers at the different price points they are willing to pay.

Travel

Airlines change prices often depending on the day of the week, time of day, and number of days before the flight.[4] For airlines, dynamic pricing factors in different components such as: how many seats a flight has, departure time, and average cancellations on similar flights.[5]

Entertainment

Sports ticketing is a segment of the entertainment industry that uses real-time pricing to boost revenue. Dynamic pricing is particularly important in baseball because MLB teams play around twice as many games as some other sports and in much larger venues.[6]

Sports that are outdoors have to factor weather into pricing strategy, in addition to date of the game, date of purchase, and opponent.[7]

Tickets for a game during inclement weather will sell better at a lower price; conversely, when a team is on a winning streak, fans will be willing to pay more.

Retail

Retailers, and online retailers in particular, adjust the price of their products according to competitors, time, traffic, conversion rates, and sales goals.[8] The aim of dynamic pricing is to increase revenue and profit. There are three basic ways to do this.

  • First, retailers can use price intelligence to reprice based on the prices of their competitors.
  • Second, retailers can drop prices when demand is low.
  • Third, retailers can increase prices while demand is high.

Dynamic Pricing at Amazon Marketplace

The Amazon marketplace is very crowded with sellers. There, dynamic pricing means retailers can change the price of products immediately, intensifying competition.[9]

For over 3 million of retailers selling via Amazon Marketplace and jointly responsible for over $60 billion in annual sales volume, winning the Buy Box at the highest possible price is the key. [10]

Pricing Based on Competitors

Businesses that want to price competitively will monitor their competitors’ prices and adjust accordingly. Amazon is a market leader in retail that reprices often,[11] which encourages other retailers to alter their prices to stay competitive. Competitor-based dynamic pricing can increase sales, especially if they take advantage when other retailers run out of stock.

Time Based Pricing

Many industries change prices depending on the time of day, especially online retailers, whose customers usually shop the most in during weekly office hours between 9AM-5PM.[12] Raising prices during the morning and afternoon and lowering prices during the evening is a common practice with dynamic pricing.

Transportation is another area where prices vary based on the time of day. The San Francisco Bay Bridge charges a higher toll during rush hour and on the weekend, when drivers are more likely to be travelling.[13] This is an effective way to boost revenue when demand is high, while also managing demand since drivers unwilling to pay the premium will avoid those times. Dynamic pricing in transportation is also called peak-load pricing.

On-demand services

Dynamic pricing is also practiced by on-demand services such as Uber, Lyft, and Sprig.[14] Uber's system for "dynamically adjusting prices for service" measures supply (Uber drivers) and demand (passengers hailing rides by use of smartphones), and prices fares accordingly.[15]

Conversion Rate Pricing

Conversion rates measure how many browsers on your website turn into buyers. When conversion rates of viewers to buyers is low, dropping the price to increase conversions is standard with a dynamic pricing strategy.

Future of Dynamic Pricing

More retailers are considering dynamic pricing,[16] as many have already adopted some form of it in order to counteract showrooming. The concept of dynamic pricing has been around for many years, particularly in the airline and hotel industries, but retail is one of the newer industries to adopt this pricing strategy, and it’s growing rapidly. Many believe dynamic pricing will become more relevant in the future of ecommerce.[17]

References

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