Following the norms is no longer the recipe for a successful business. Perceiving the fierce competition in the market today, pricing strategies cannot be static anymore. This is where dynamic pricing steps in.
Rapido’s surge pricing model is a great example of this. Have you ever noticed the prices of the rides being comparatively higher during peak hours, adverse weather conditions, at night, or on holidays? This change in price structure is dynamic pricing and has been in practice since 1980, particularly in the hospitality and travel industries.
According to McKinsey & Company, companies that apply a dynamic pricing model, their businesses can improve profits by 2% to 7%. Therefore, knowing all about dynamic pricing is essential to attracting a similar profit percentage for your business.
So, let us explore what is dynamic pricing strategy and why it is essential in 2024.
What is Dynamic Pricing?
Dynamic pricing, or surge pricing, is a pricing strategy where prices for goods and services constantly change based on different volatile factors. Compared to those with fixed pricing plans, companies using dynamic pricing rely on data-driven algorithms and technology to instantly alter their prices. This fluctuation keeps businesses competitive and helps make them more money.
Some of the factors that influence the pricing include:
- Customer’s interest in the product
- A product's current demand compared to its supply
- Competitive prices
- Market trends
How Does Dynamic Pricing Work?
Dynamic pricing is a complex but effective method requiring several phases and considerations. Here's a full explanation of how dynamic pricing typically works:
Be Systematic: Begin the systematic collection of detailed data. It incorporates all the information, such as customer transactions, stock levels, competitor's pricing strategies, and general market trends.
Perform Detailed Data Analysis: Break down the collected data with powerful analytical tools. The next step is to carefully test price elasticity, identify purchase items, and understand the competitive environment. Run statistical analyses and track how different price points affect sales volume and revenue.
Create a Clear Pricing Strategy: Develop transparent pricing strategies based on the company's financial targets, i.e., take up market share or margins to penetrate the competition. Set measurable, time-bound goals for each product or service.
Conduct A/B Testing for Prices: Perform A/B testing with a certain segment of customers to check how well the pricing strategy is working before moving on to a full-fledged rollout. Track purchase decisions and sales performance under a number of pricing scenarios.
Deploy Real-time Price Adjustment: Integrate the pricing algorithm with all sales platforms. This step is supposed to make sure that prices are set in real time, reflecting immediate changes in demand, inventory status, and competition actions.
Perform Continuous Performance Monitoring: Create dashboards to track key performance indicators (KPIs) such as sales growth, profit margins, and customer acquisition.
Why Dynamic Pricing Strategies Are Essential in 2024?
Following traditional pricing strategies in the dynamic digital age can leave companies struggling. The following are some of the reasons why a dynamic pricing strategy is essential:
Increased Competition
With the rise of global e-commerce platforms such as Amazon, companies need to adapt quickly in order to stay competitive. Dynamic pricing strategy enables a company to compete with bigger competitors.
Better Customer Engagement
Dynamic pricing significantly affects consumer engagement and satisfaction in addition to revenue and inventory management. This tactic lets you adjust your prices to your client's changing needs and tastes.
One primary way dynamic pricing improves consumer engagement is through individualised pricing. Businesses can offer tailored discounts, promotions, and loyalty benefits by evaluating customer data and behaviour. This personalised touch instils a sense of value and appreciation in clients, prompting them to return and make repeat purchases.
Technological Advancement
The introduction of artificial intelligence (AI) and machine learning technologies over the years has improved dynamic pricing strategies. Today, more businesses can understand, learn and implement dynamic pricing strategies. From real-time data analytics to forecasting demand trends, harnessing AI can significantly help companies understand optimal rates and base their dynamic pricing models on it.
Conclusion
Dynamic pricing strategies today are transforming how businesses operate. Getting familiar with these concepts has become important for product managers to continue excelling in their businesses.
If you are someone who is interested in pursuing a career in product management, you can opt for the Professional Product Management Certification course offered by Imarticus Learning in collaboration with the Indian Institute of Technology (IIT) Roorkee.
Designed for the duration of 5 months, the IITRPM programme helps learn more about modern product development skills. With a carefully curated, well-rounded curriculum, this course is all you need to set yourself up on the path to success.
