The future of pricing is here, and it’s called dynamic pricing. Discover how this specialised revenue management pricing strategy is making waves both online and offline, and why it’s set to transform the business landscape forever.
What is Dynamic Pricing?
Dynamic pricing is an Artificial Intelligence-driven pricing system that adjusts the prices of products and services based on external factors, such as real-time supply and demand, market trends, competitor prices, seasonal patterns and more. It is also sometimes known as surge pricing, demand pricing and time-based costing. Dynamic pricing is commonly used in the hospitality industry, where prices fluctuate in accordance with peak and off-peak seasons. Today, most would also recognise it in ride-hailing and food delivery apps — where prices of the same offerings might change several times throughout the day.
Benefits of Dynamic Pricing
Dynamic pricing is the opposite of static pricing, where prices remain constant despite market changes and pressures. This strategy provides businesses with the upperhand to evaluate the climate of the industry in which they operate and set appropriate prices. Besides maximising profits, dynamic pricing can help to mitigate heavy losses. One notable example is by lowering prices to meet lower demands, thereby clearing inventory even amidst sluggish periods.
While the key concept of dynamic pricing is straightforward and sounds compelling enough, what other benefits does it offer beyond providing a better vantage point and improving decision-making? Truth is, there’s more to gain from this greater control. Here are some of them:
- Enhanced Competitiveness: Dynamic pricing enables businesses to stay ahead of the competition by providing an accurate and current snapshot of the market, allowing them to respond with justified and attractive prices while maintaining profitability.
- Increased Adaptability: This model also gives the freedom and flexibility to adapt to changes in the sales environment, such as economic shifts, competitor actions, consumer behaviour changes, supply chain disruptions and regulatory changes.
- Demand Forecasting: Businesses get to know their consumers better with dynamic pricing, as the system utilises analytics and insights derived from historical sales data, machine learning, competitor pricing and more.
- Automates Pricing: Dynamic pricing streamlines the complex and time-consuming process of analysing vast amounts of data and suggesting optimal prices.
- Better Resource Management: By freeing up time and resources, dynamic pricing lets businesses operate more efficiently by allocating manpower to higher-value areas and rewarding them accordingly, such as during periods of high demand.
Application in Online Business
Online businesses are increasingly adopting dynamic pricing strategies on e-commerce platforms. Artificial Intelligence (AI) and machine learning algorithms help businesses operating in the digital space to assess and maximise price points to optimise them.
Amazon emerges as a role model in harnessing this sophisticated technology, altering its prices up to a whopping 2.5 million times a day. The e-commerce behemoth changes its prices based on factors such as demand, inventory levels, and peak periods like Black Friday. Other examples include airlines tailoring flight prices to demand and seat availability, and digital advertising platforms adjusting prices based on ad placements.
Application in Offline Business
The use of dynamic pricing in offline businesses tends to be less automated compared to online businesses. This is because brick-and-mortar stores often lack the advanced infrastructure and resources to conveniently support dynamic pricing initiatives as seen in digital storefronts like specialised e-commerce platforms.
However, this does not stop the pivot towards embracing dynamic pricing solutions. For example, some public transportation systems implement dynamic pricing for tickets based on rush hours, distance travelled and holidays. To successfully take on dynamic pricing, offline businesses must establish a means of collecting data and adjusting prices rapidly or in real-time.
Controversies and Challenges
Dynamic pricing is a type of price discrimination, wherein varying prices are charged to different customers for the same product or service.
While price discrimination is a common sales strategy, it raises moral concerns, especially when it’s applied to basic necessities such as medication. Moreover, it is deemed unethical, and in some countries, illegal when businesses engage in collusion to manipulate price levels — an act known as price fixing.
As technology advances, the protection of customer data has become a contentious issue. With the proliferation of data collection and targeted advertising, consumers increasingly recognise the importance of safeguarding their data privacy.
The increased adoption of dynamic pricing has also led to controversy in recent years, even in recent months. Fast-food chain Wendy’s made headlines earlier this year when its pricing strategies were misconstrued as the introduction of dynamic pricing to its menu, prompting backlash from US consumers. This elicited anger and frustration as fast food is often seen as an affordable food option, and consumers felt that they were being robbed by a lack of transparency in pricing strategies.
Meanwhile, in Singapore, fans of jazz-pop singer Laufey were dismayed to learn that concert ticket prices would be determined by demand, raising concerns that this could set a troubling precedent for future ticketed live events.
Future Trends and Developments
As we step into the future, dynamic pricing is poised with advancements in technology and changes in market needs and preferences. Many predict that dynamic pricing solutions will be further revolutionised by AI and machine learning, enabling more fine-tuned, real-time price adjustments.
It is also likely to accommodate individual customers with high levels of personalisation while expanding across various industries. Along with this evolution will naturally come increased scrutiny over its ethical implications, resulting in regulatory bodies establishing guidelines to ensure fair and transparent pricing practices for the protection of consumers.
Conclusion
AI-powered dynamic pricing is transforming both online and offline business landscapes by offering newfound flexibility and precision in pricing. Bringing significant advantages like enhanced competitiveness, adaptability and better resource management, businesses that leverage this technology must learn to comply with guidelines and maintain fairness, transparency and consumer interest. By staying ahead of these developments and responsibly implementing dynamic pricing, businesses can optimise their operations and meet evolving market demands while sustaining consumer trust.
If you want to be a part of this exciting revolution and embrace the multifold benefits of dynamic pricing, you’re certainly not alone. At IXEN Interactive, we have helped many businesses smoothly transition to this AI-driven approach. As an award-winning creative technology agency, we have amassed years of experience and expertise in guiding others through their remarkable digital transformation. Learn how we can help you get in the game and stay at the forefront of your market by contacting us today.
