American Airlines would have never thought when they introduced dynamic pricing in early 80’s that it would become a grand success in the market. Dynamic pricing is a new strategy where the prices are determined by real time supply and demand. It allows retailers to monitor the price 24/7 and increase the profit by 25% on average which makes it highly competitive in the market.
Amazon is one of the top ten retailers in US who are largest users of dynamic pricing since it changes the price every 10 minutes on average. They have generated an income of $44 billion sales last year (2013) which counts to an increase in sales about 27.2%. Walmart is yet another successful leader in ecommerce industry who adapt to dynamic pricing strategy and changes price about 50,000 times a month. There sales grew 30% in 2013 with 27% increase in global web sales in first quarter of 2014.
Some of the methods adopted by the market leaders to implement dynamic pricing are discussed below.
a) Segmented pricing: The company set different prices for the same product irrespective of its production charges and distribution cost which remain the same. This is mostly used in pricing strategy adopted with different geographical location. The pricing differ based on the current location which is a wise strategy to attract niche customers whose need are different from others. Similarly, the cost of reservation for first class a/c compartment in trains are higher when compared to sleeper non a/c compartment. Thus segmented pricing is useful for increasing the revenue from targeted customers where people are less sensitive to pricing.
b) Peak pricing: The pricing is based on the demand in the market. When the demand is high in the market and the inventory of competitor is low, the retailers set high price. For example, the cost of hotel rooms are high during peak seasons or holidays rather than on normal days.
c) Time-based pricing: This is based on the age of the product or how long it has been in the market. By reducing the price of older products, an increase in its sales can be realized. When newer products are introduced in the market, then the price of older versions can be lowered to increase the sales which is nothing but a strategic pricing method.
d) Penetration pricing: The newer products can be introduced in the market with initial lower price than the current market price, which can be later increased based on the demand for the product in the market. This strategy can be useful to divert the customers of the competitors or pull the customers to your new product. When your product becomes more and more popular then the price can be increased gradually.
e) Bulk orders: The price may be less for the bulk orders such that user get the benefit. For example: in restaurants, a combo pack of eatables may cost less when compared to the individual pricing of the product. Thus profit can be seen in individual products as well as sales can be increased using the cost reduction for bulk purchases.
f) Service time: If the service rate is faster then usually pricing is also more. For example: If urgent service or need for product is more then price can be altered accordingly. Similarly charges can be different for day time service or night time or late hours service.
g) Uncertain market: When the life span of the product is low then prices can be set accordingly. When the sales falls, the price can be lowered to boost the sales. Prices can also be increased with increased demand.
Advantages: The products inventory can be moved rightly by identifying the potential advantage of dynamic pricing. The product price can be adjusted based on time and demand. The price differs according to seasonal need of the product. The pricing of consumer products greatly depend upon their life span and demand.
Disadvantages: The difference in pricing of same product sold at different cost may aggravate the end user to return back the product if they have paid more for the same product. There may be chaos among unsatisfied users who may spoil the market of the product by spreading negative messages about the product.
In general, dynamic pricing can be your sure ticket to hit the market when the product is worthwhile.