Retailers use dynamic pricing. In addition to retail stores, it can be implemented online. It adjusts product and service prices based on consumers’ willingness to pay at a given time. Products and services have variable pricing. Supply-and-demand pricing isn’t enough. Rareness affects pricing, but so do consumer income, demand, and a product’s long-term profitability. Dynamic pricing is automated by many companies to maximize its benefits. Dynamic pricing is based on advanced data. Dynamic pricing’s pros and cons should be examined.
Dynamic pricing benefits
It boosts sales.
Businesses often raise prices using dynamic pricing. Although true, the practice can also reduce prices. A lower price can boost lagging sales, allowing a company to meet sales revenue for a day, a month, or longer. A flash sale can encourage local dynamic pricing.
It can boost profits.
Dynamic pricing maximises profits when competitors charge more. If you know what your customers want, you can price items accordingly. A customer wants a pencil. You sell pencils for $0.75, while your competitor charges $2. Dynamic pricing lets you sell a pencil for $1.25 to a shopper and make them think they saved money.
It could boost demand.
Empty seats equal no revenue, so events use dynamic pricing. If there’s still seating on event day, some customers may get a discount. This maximises profits while using available revenues. This process is used in hotels, transportation, and other industries with variable demand.
Prices reflect demand.
Consider a tomato farmer. Summer is easier because there is more sunlight and rain. You can pass on lower crop costs to your customers. Your greenhouse is full of winter tomatoes. The cost of the greenhouse doesn’t include light and water. Dynamic pricing adjusts the price of your tomatoes to reflect the extra work required to market them.
It reveals customer behavior.
Dynamic pricing simplifies calculating each customer’s demand curve. This curve shows consumers’ minimum and maximum transaction prices. This curve uses many data points, including the shopping device. With more consumer data, sales are more likely to occur.
Dynamic pricing’s cons
Customers hate it.
Customers aren’t opposed to non-fixed-price strategies. Dynamic pricing bothers them. It can save money, but it’s usually used to boost business margins. Customers feel overcharged and have no recourse. Pricing should match a company’s brand identity.
It’s a gameable system.
Shoppers know dynamic pricing is used. They know that if they shop around too much, the price may go up. This has led to more private browser sessions for product research, limiting the amount of data collected. Customers who know what you’re doing will spend less.
Price wars are possible.
Have you seen a gas price war? One business lowers their fuel price, so the other does too. This continues until a business can’t survive at the low price. Dynamic pricing scares many retailers. Automation software ensures that items are never priced below cost.
It can alienate customers.
Customers hate seeing someone else pay less for the same item. Many businesses that use dynamic pricing have customers request refunds for the price difference. Even if a refund is given, the customer may still create negative content that affects future customers.
It could cost a sale.
With internet saturation rising every year, many customers research before buying. When they buy something, they may know the MSRP. If the price is too high, they’ll shop elsewhere. Some won’t speak. They may never return to your business or website.
It lowers customer loyalty.
When consumers are unhappy with a business’s pricing strategy, they’re less likely to return. Trust encourages repeat purchases. Your dynamic pricing strategy encourages consumers to shop around. If they find a better price, their reduced loyalty will increase a business’s chances of losing a sale.
It boosts competition.
Dynamic pricing changes the value proposition for customers who find a brand valuable. It shows that a company’s priority is profits over customer service. When that happens, more brands believe they can disrupt the industry.
It may cause customer service issues.
In 2014, Uber’s dynamic pricing went awry. After a shooting in Sydney, many Uber customers booked rides out of the area. Automated processes detected increased demand and implemented surge pricing to boost profits. Fares quadrupled. Uber justified the cost by raising fares to encourage drivers to enter the danger zone. The algorithm didn’t take the danger into account.
These dynamic pricing benefits and drawbacks demonstrate that businesses that use this strategy can make more money. The average company that uses dynamic pricing can increase their margins by 10%, if not more. This, of course, comes at the expense of consumers who are turned off by this pricing strategy. It can be beneficial if implemented correctly.