Pricing your goods or services to sell is never an easy task. There are so many factors to take into account. What is the cost of goods sold? How much are your expenses? How do your prices weigh up against the competition?
On top of this, all these factors could very well change throughout the year. That’s where dynamic pricing comes in.
What is dynamic pricing?
Dynamic pricing is a method of pricing goods or services based on real-time demand and changing circumstances. You can use machine learning and algorithms to structure your pricing so that it fluctuates.
With dynamic pricing, factors such as supply and demand in the market and competitor prices are taken into account. There are pros and cons to this pricing method and it probably isn’t the simplest method of pricing goods.
Which industries work best with dynamic pricing?
Dynamic pricing won’t necessarily work in every industry. The industries most likely to use dynamic pricing are travel, hospitality, retail, e-commerce businesses or entertainment.
One example is when travel businesses charge more during the summer because there is increased demand. Regular financial reporting can help assess the suitability of dynamic pricing in a business, or even inform decisions on long-term price changes.
Pros and cons of dynamic pricing
Changing the prices based on demand and other factors can be beneficial for your profits. However, there are some cons to take into account too.
Pros of dynamic pricing
- You can remain competitive – Dynamic pricing allows you to look at the competition’s prices and potentially offer something more competitive. This can be great during times of lacklustre sales.
- It can help grow your business – Using dynamic pricing could boost your growth more than if you had the same prices all year round.
- Automation can save time – If you’re using automation tools to manage your direct pricing this can save you a lot of time. You won’t need to spend hours poring over sales data and calculating profit margins or prices yourself.
Cons of dynamic pricing
- Frustrated customers – Customers can get quickly frustrated with inconsistent prices.
- Price wars – With several businesses fighting to be competitive, this could lead to a price war which can be unsustainable in the long run.
- Customers may see it as unfair – If the prices fluctuate based on things like demographics or current events, customers could see it as unfair. For example, hiking the price of face masks during a pandemic.
- It could be difficult to set up – When it comes to machine learning and algorithms, it’s not the easiest thing to navigate. You may need to set up an entirely different system to manage it all.
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