Dynamic Pricing Strategies and Examples : Wheelhouse Blog

Dynamic Pricing Strategies and Examples

June 1, 2022 | wheelhouse

Have you ever wondered what dictates the cost of your flight to Munich or your hotel stay in Miami? In every industry, the current market is constantly fluctuating. Whether it’s entertainment or accommodation, products and services cost more during certain times of the year.

This can feel frustrating to consumers: You might feel like your dollars are subject to price discrimination. But for businesses, dynamic pricing strategies and examples prove to be an efficient business strategy to improve profit and even offer discounts. Just ask our Wheelhouse clients—our dynamic pricing software tool helps them increase revenue and better manage their rentals.

But how does dynamic pricing work? Are there different rules for dynamic pricing in retail vs. dynamic pricing in airlines? Today, we’ll cover everything you need to know about dynamic pricing strategies and examples.

What is Dynamic Pricing?

Dynamic pricing is the practice of using the current market demands to inform your pricing. That means keeping prices flexible to change with competition and the market.

Behind every dynamic pricing tool are machine learning mechanisms that assess market data and competitor behavior. The result of those insights? New prices are optimized to improve revenue without turning away your customers.

The goal? Improve revenue and lower costs with popular dynamic pricing strategies like:

Discounted pricing: Lower price for first-time clients, first units rented, or first chunk of time in the year. Also known as “penetration pricing,” sometimes used when a new business wants to “penetrate” the market.
Bundled pricing: Packaged deal for a product or service
Performance-based pricing: Pricing based on a product’s utility and market demand rather than the value

However, these aren’t the only dynamic pricing strategies and examples out there. We’ll get into a few more later in the article.

So, what’s the point of using dynamic pricing?

Dynamic Pricing Benefits

Most of the benefits fall with the business owners; however, the consumer sometimes benefits too!

More sales: Dynamic pricing helps you capture all potential customers through segmented pricing or reduced time-based pricing at the end of the day. Bottom line? More sales and higher occupancy rates.
Discounts for consumers: If a customer purchases a product or service during a low-peak time, they can reap the rewards of discounted pricing. Additionally, more competition means lower prices.
Stand out from the competition: Machine learning helps you understand your competitors’ behaviors. If they all charge more for an identical product, you might price yours slightly less to capture more of the market.
Saves time and costs: Dynamic pricing software like Wheelhouse does all the heavy lifting for data collection and analysis. The automation saves you time in sifting through data or the cost of hiring staff to do it for you.

But dynamic pricing isn’t always the best option. They have some challenges, but with preparation you’ll be all set!

Dynamic Pricing Disadvantages

Here are some dynamic pricing disadvantages for both customers and businesses:

Customer dissatisfaction: If you change your prices too often, some customers might become frustrated. They may perceive a lack of transparency and opt for businesses that keep their prices more consistent. Ensuring you’re clear about your pricing structure and aren’t changing prices too frequently can help with this.
Learning curve: Some dynamics pricing technologies have bigger learning curves for your employees. For example, unintuitive software might make your workflow less efficient. Luckily, Wheelhouse’s dynamic pricing software is super user-friendly and easy to operate.
Price wars: Informing pricing solely on competitor behavior could result in price wars. If you price too low to meet your competition, you might minimize your profit margin to the point of unsustainability. However, most dynamic pricing software lets you pick a price floor to ensure you don’t surpass your business limitations.

Types of Dynamic Pricing

You can use many dynamic pricing strategies and examples to improve your business. Here are a couple of strategies:

Segmented pricing: This strategy entails using different pricing for identical products based on customer segments. For example, you might price higher for customers who need the product more in a specific location. Or, you might charge less for customers that might not otherwise purchase your product. For example, bus companies often offer student discounts.
Segmented pricing: This strategy entails using different pricing for identical products based on customer segments. For example, you might price higher for customers who need the product more in a specific location. Or, you might charge less for customers that might not otherwise purchase your product. For example, bus companies often offer student discounts.
Time-based pricing (day): If you want something right away, you’ll likely pay more. Some examples of time-based pricing include same-day delivery surcharges with FedEx and delayed arrival discounts with Uber. Similarly, time-based pricing might entail using lower prices to sell the remainder of a product batch.
Competitor-based pricing: Are your competitors all charging more or less for your identical products? Competitor-based pricing entails informing your pricing based on competitor behavior. While competition is great for sales, this pricing model doesn’t always encompass other vital factors, like initial costs. For example, your competitors might have lower expenses than you, which might explain their lower prices.
Peak pricing (also called seasonal pricing): A hotel room in the South of France will cost more in July and August versus February, just like wedding venues cost more from May–October than from November–April. Peak pricing informs price surges based on increased demand at certain times of the year.
Location-based pricing: If you’re international, you’ll know that consumers worldwide have different incomes and behaviors. Someone living in LA would see higher prices than someone living in Mexico, because research over time has shown that the person in LA has more buying power. Location-based pricing accounts for these factors and shows different prices based on your geo-location.

Dynamic Pricing Examples

1. Ride-sharing

Have you ever scheduled an Uber ride at 2 a.m. only to find that the ride costs you triple the usual price? At 2 a.m., Uber doesn’t have as many competitors offering you a ride. And, you don’t have other available options like walking (might be unsafe) or public transportation (might stop running).

You might also notice Uber offers discounted prices for members, first-time users, and referrals. And you’ll also pay much less for an Uber in Mexico versus Amsterdam.

Ride-sharing apps often use the following dynamic pricing strategies:

2. Airline tickets

Airline tickets usually cost more depending on the season. Search up a flight from New York to Paris in February versus July—enough said. Likewise, you might find more expensive flights on the weekend (Saturday and Sunday) versus the week (Monday or Tuesday). Airlines notoriously use the following strategies:

3. Hotels and Airbnbs

Our opinion? Hotels and Airbnbs can’t pump up revenue or compete with other hotels without dynamic pricing strategies. If you’re in this business, you have to stay up-to-date on everything that could inform consumer buying habits: competition, market demand, location, peak times, and more.

Hotels might increase prices during the high season but must know when to bring them down to accommodate the low season dips in occupancy.

The most popular strategies we see for hotels are:

5. Amazon and other eCommerce sites

Amazon bases its pricing on one predominant factor: market demand. Machine learning leaders, Amazon has surpassed revenue and profits on identical products sold at Barnes & Noble and Toys R Us.

Because of its vast consumer pool, Amazon has dedicated price management teams that change prices with the market as frequently as multiple times per day. Other e-commerce sites have caught up but don’t have the same technologies or resources that Amazon does.

Moreover, e-commerce websites sometimes have access to a valuable price driver: browser history. Say you regularly purchase tickets to see NFL games, or regularly browse research about candles. E-commerce stores selling related services might use segmented pricing strategies to charge you more for the same product!

6. Event tickets

A Kendrick Lamar concert didn’t cost the same price in 2008 as now. That’s because ticket-selling giants like TicketMaster use dynamic pricing to their advantage. Depending on popularity of the event, date of the event, how quickly tickets are being sold, and the location of the event–pricing changes!

You’ll usually see market-demand pricing strategies for event tickets from baseball games in New York to unique events in Sacramento.

7. Google Ads

Amazon isn’t the only machine learning leader in the mix. Google quietly uses dynamic pricing strategies on its ads based on market demand gathered from user behavior.

For example, Google can adjust pricing based on the number of interactions and impressions customers place on a product. More interactions mean more interest and demand, which may inform higher prices.

8. Utility services

Do you do your laundry in the evenings? We’ll bet it’s to save money on your electricity bill, which is higher if you consume electricity during peak times. Most utility companies use peak (seasonal) and time-based pricing strategies.

For example, in Ontario, Canada, time-of-use electricity rates are higher during peak times (during the day on weekdays) and lower during off-peak times (evenings and weekends).

Best Dynamic Pricing Strategies

The best dynamic pricing strategies will meet your unique business needs. You need to test out your dynamic pricing strategies and ensure alignment with your industry, business goals, and services.

And the best dynamic pricing strategy can still vary within. If you sell private jets, you’ll still have a different dynamic pricing strategy than if you’re a private jet chartering company.

Our recommendation? Don’t use one pricing strategy without testing or studying to ensure alignment. Or, use a dynamic pricing software that can provide the expertise you need.

Dynamic Pricing Practices to Avoid

While dynamic pricing is a great option for your businesses, you want to make sure you’re using the strategies correctly.

1. Ignore your customers: Offering a discount for a limited time or a special package deal? Your customer might not browse your website and notice it on their own. Always inform your customers when your price dips—they’re the primary benefactors of this information! If you haven’t started a customer mailing list, now’s the time.
2. Use bad data: Market, consumer, and competitor data constantly change. The worst thing you could do is inform pricing with out-of-date data. If you enlist support from a dynamic pricing software service, always inquire about their data collection methods. For example, Wheelhouse publicly documents its statistical approach and data-leveraging methods for its customers. With marketing intel and competitive data, Wheelhouse provides it all.
3. Only prioritizing profit: Data is the best informer for pricing, but not at the expense of your business’s humanity. Don’t forget the human aspect of your customers and price yourself out of the market. Likewise, be cautious about peak and market demand pricing during sensitive times for certain products, services, and locations.

How to Set Up Dynamic Pricing for Your Product

We’ve covered a lot of ground! From time-based pricing to maintaining humanity amidst the data, businesses have their work cut out in deciding on a strategy.

We’ve made it easy for you with these dynamic pricing steps:

1. Define Business Goals

First, keep your business goals and values handy. Think about what you want to accomplish with your dynamic pricing strategy.

Do you want to penetrate the market as a new business?
Do you want to offer the cheapest possible service?
Do you want to reach a new audience?
Are you itching to increase your hotel occupancy rates?
Is there a competitor with whom you desperately want to compete?

Once you think about your goal, make sure it aligns with your overall business strategy. A clearly defined goal helps you get the most out of your dynamic pricing strategy.

2. Choose a dynamic pricing method

Using your pricing goals, you can now choose a dynamic pricing method. For example, if you want to reach a new audience, you might use segmented or discounted pricing strategies.

The pricing method you choose relies mainly on your business goals and limitations.

3. Set a schedule

Decide when you want your pricing to change and the influencers behind each change, from last-minute discounts to season adjustments to minimu pricing. Don’t worry–a dynamic pricing software like Wheelhouse takes care of all that for you once you input your

4. Test & analyze results

In business, nothing is absolute. Your pricing strategy might have impressed investors on paper but ended up a complete bust in practice. Test out your strategy and find out what works and what doesn’t. Then, use that new insight to change your course.

Conclusion: Get Started with Dynamic Pricing

Dynamic pricing strategies and examples help you visualize and realize revenue boosts and greater efficiency. Although you must be wary of certain disadvantages, Wheelhouse can help you manage them all. You can set base prices, minimums, and maximums to maintain, no matter your dynamic strategy.

Furthermore, our easy interface ensures your business operations stay smooth.

Ready to inform your pricing and make more money? Try out Wheelhouse for free today!

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