How we change what others think, feel, believe and do

Dynamic Pricing

Disciplines > Marketing > Pricing > Dynamic Pricing

Description | Example | Discussion | See also

Description

One way of pricing is to change the price of each item sold based on as many information factors you can discover and handle.

Factors you may want to include when doing dynamic pricing include:

• Demand levels (from 'no interest' to 'can't meet demand')
• The cost of the item to you (it would be nice to make a profit)
• Stock levels (and cost of stock holding)
• Transportation costs (including to customer)
• Competitor prices at this moment (who may also be using dynamic pricing)
• Date constraints (food 'sell by' date, seats on planes, package holidays, etc.)
• Customer purchase personality (such as fearfulness, impulsiveness, need for information)
• The time customers take to decide (delays may mean considering alternatives)
• Previous customer activity (what they bought, when, for how much, etc.)

Example

A corner store gives regular customers small discounts, especially those who find it difficult to pay. They will haggle for things they want to shift, but keep the price high when customers seem very keen or when stocks are low.

An air ticket company prices low initially then raise prices as the flight date approaches, thus encouraging customers to buy early and profiting from late bookers who have no alternative. They also vary prices based on known previous purchase activity.

A web retail site constantly scans competitor prices and sets prices as viewed to be slightly below these.

Discussion

Dynamic pricing is commonly used on the web these days, where information can either be captured from one's own customers or by purchasing databases of information. You can analyze the data yourself or you can pay others to do it (smart data analysis can be quite complex). For transactions on your own website, your web suppliers may well have tools you can use.

The level of dynamic data analysis you need will depend very much on your business and your intent. A small retailer may depend just on their own instincts, while a large company may employ a whole department of analysts.

Dynamic pricing can be viewed as guided experimentation. You do not know what the actual effect of a price change may be, but you can use data to help make a good guess. Such experiments create their own data, of course, making dynamic pricing a series of increasingly intelligent decisions.

One factor that must be considered is customer response to knowing that prices will vary, and who may themselves play their own dynamic games in response, for example pitting your prices against competitors.

See also

Competitive Pricing