Dynamic pricing strategies involve changing market prices for goods and services according to various factors and key metrics. Unlike static pricing, this type of pricing allows companies to maintain profit margins.
To learn more about how dynamic pricing works and what the pros and cons of various strategies may be, consider the following 11 dynamic pricing examples.
1. Surge Pricing
Surge pricing is among the most common forms of dynamic pricing. It essentially involves changing prices for products and services based on current market demands. A company might also account for how available its services are or aren’t at certain times when setting prices.
Example: Surge pricing is very common among companies like Uber. If there is high demand for Uber’s services in a given area at a given time, those services will cost more than they might during other times of day.
Pros and Cons: Surge pricing is a reliable approach to dynamic prices because it involves simply changing prices based on the laws of supply and demand. However, to determine when prices should change, a company often needs to monitor real-time data. This may prove challenging for a small business that doesn’t have the tools required to automate this process.
How to Implement: It’s best to automate surge pricing with a tool or dynamic pricing software that automatically changes prices for your services based on demand. If you don’t have access to such a tool, consider reviewing historical data. Said data could help you better determine when prices should increase and when they should decrease.
2. Cost-Plus Pricing
Cost-plus pricing is a strategy designed to improve profit margins. With this dynamic pricing strategy, a business will set a price for a product or service by determining what it costs the business to offer said product or service, and simply adding a percentage to that cost. Said percentage can change over time due to various factors, such as what’s common in the industry at the time, how customers react to a certain price, general market trends, etc.
Example: A business determines it costs $10 to offer a product. They add a 40% markup when setting the price, selling the product for $14.
Pros and Cons: The main appeal of cost-plus pricing for businesses is that it allows them to simplify the process of establishing prices. It’s also a great way to appeal to customers who may desire transparent pricing. That said, a business’ own costs can change due to everything from labor costs to supply chain issues. This means a markup that might have resulted in a strong profit margin once might not do so in the future.
How to Implement: To implement this dynamic pricing model when making pricing decisions, simply determine what your different products and services cost you. Choose a percentage markup that you believe would allow you to optimize profit margins.
3. Peak Pricing
Demand for certain products or services may increase during certain times of year. Peak pricing is a dynamic pricing approach that accounts for these changes in demand, with prices increasing accordingly.
Example: Perhaps a popular music or arts festival attracts visitors to a particular area at the same time of year every year. Hotel rooms in the area might be more expensive than they usually are during this time.
Pros and Cons: Peak pricing is a dynamic pricing approach that allows you to consistently adjust prices according to a set schedule every year. This simplifies a dynamic pricing strategy. However, competitor prices may also change in a manner similar to your own during this time of year, making it difficult to stand out.
How to Implement: Identify a time or season when there tends to be high demand for your products or services. Change your prices to account for these changes in demand.
4. Competitor-Based Pricing
As the name implies, this dynamic pricing strategy involves adjusting prices based on competitor pricing. If a competitor begins charging more for a service, you could charge less, giving customers a reason to choose you over said competitor.
Example: Two roofing companies serve the same general area. One company runs a promotion reducing the cost of its services. The other company changes its prices too, setting them slightly lower.
Pros and Cons: Adjusting your pricing to beat that of others in your niche naturally gives you a competitive advantage. That said, it also requires you to proactively monitor the pricing of your competitors.
How to Implement: Determine who your top competitors are. Monitor their pricing, and be ready to change yours when their service or product prices change.
5. Value-Based Pricing
This form of dynamic pricing involves accounting for the value customers believe your products or services offer when setting prices. Also known as elasticity-based pricing, value-based pricing often works by segmenting different customers into different groups.
Example: An airline conducts polls and reviews various data points to learn what types of features and amenities appeal to certain groups of customers. The airline offers economy pricing for those who would prefer to save money, a higher tier of pricing for those who desire additional amenities, etc.
Pros and Cons: Adjusting pricing to match different customer segments can help a business serve a large number of customers. However, creating these segments may require conducting major research.
How to Implement: List the various features and amenities you either currently do offer or could offer in the future. Poll your customers to determine which amenities matter most to them. This will help you set the right price for different customer segments.
6. Price Skimming
When companies use the price skimming dynamic pricing model, they set prices relatively high when first offering new products or services. These high prices are aimed at customers who may be willing to pay extra to access certain products or services before others. Over time, a company lowers prices for these products and services, catering to those not willing to spend as much.
Example: A new video game console is sold for a high price when it first reaches store shelves. Over time, the price decreases.
Pros and Cons: On the plus side, dynamic pricing methods like this one allow companies to justify charging higher prices for customers who are willing to pay them if it means having a product or using a service first. On the other hand, these early customers might be unhappy when they learn other customers pay different prices. Additionally, lowering prices too much could potentially have a negative impact on a company’s brand value or brand image.
How to Implement: As a first step, identify which products or services you may offer that you could position as being particularly groundbreaking or innovative. Set high prices that allow you to optimize profit margins when first introducing these products or services. As customer behavior begins to indicate that customers are no longer willing to pay these high prices, begin to reduce prices accordingly.
7. Bundle Pricing
A customer willing to buy one of your products or pay for one of your services may be relatively likely to pay for other products or services you offer as well. A bundle pricing model accounts for market conditions to offer certain products and services together. The total cost of the bundle is less than what a customer would pay if they were to purchase all these products or services one at a time.
Example: A company owns multiple streaming services. Customers can choose to pay for individual services, or they can pay for multiple services as part of a package.
Pros and Cons: Bundle pricing is a popular strategy because it allows a business to cross-sell to customers and boost overall sales volume. A key challenge of bundle pricing involves accurately determining which products and services should be bundled together to maximize customer satisfaction.
How to Implement: Determine which of your products and services complement each other. Bundle these products or services together, and set a lower price for them as a package than customers would pay if they were to purchase all of them individually.
8. Price Differentiation
Price differentiation involves accounting for a range of factors to set different prices for the same service. For example, a business owner might find that one segment of customers is willing to pay more for a particular service than others.
Be Aware: Dynamic pricing strategies that involve price differentiation run the risk of venturing into price discrimination territory if you’re not careful. Under the Robinson-Patman Act, price discrimination is illegal. For example, a wholesaler might not be legally allowed to offer lower prices to a larger business, as this could prevent small businesses from remaining competitive. It’s important to familiarize yourself with such pricing rules to avoid violations.
Example: Airlines often engage in price differentiation. Ticket prices could be higher when traveling on a popular route than they are on less popular routes.
Pros and Cons: Again, one of the drawbacks of this approach to making price changes is that you have to exercise caution to avoid accidentally breaking the law. Additionally, if customers become aware that you offer variable prices, those who pay more might be unhappy with your company. On the other hand, if some customers are genuinely willing to pay more than others, price differentiation allows you to maximize the value of these customers.
How to Implement: List various factors (such as geographic location) that you may account for when setting different prices for different customer segments. Examples include geographic location, income level, and customer demand.
9. Penetration Pricing
Penetration pricing is almost the opposite of price skimming. With penetration pricing, a business strives to gain a market share by offering a service or product at a lower price than competitors, and increasing the price once its market share has been achieved.
Example: Various types of service providers may engage in penetration pricing. For instance, maybe a new office cleaning company enters an already crowded marketplace. The new company may offer competitive pricing at first to give customers a reason to work with them instead of the companies they’ve already been working with. Once the new company has a reasonably large customer base, its prices can change to begin matching competitors’ prices.
Pros and Cons: Penetration pricing is often an effective way for a business to easily attract customers by offering the lowest prices. On the other hand, determining the right time to increase prices can be difficult. Also, customers who’ve grown used to more competitive pricing might be unhappy when a company decides to increase its prices.
How to Implement: If you’re offering services or products that many competitors already offer, set lower prices that allow you to still make a profit. You may increase prices once you believe you have built up a strong market share.
Tip: You shouldn’t necessarily set your prices as low as they can go if you’re offering a specialized service or a luxury product. One of the principles of value-based pricing is that prices can influence how valuable customers perceive a product or service to be. If your prices are too low, customers might feel that your services are of a lower quality than those of your competitors. Remember, there’s a difference between “affordable” and “cheap.”
10. Exchange-Rate Pricing
Exchange-rate pricing is a type of dynamic pricing that’s particularly ideal when a company does business in multiple countries. It simply involves changing the price of a product or service due to changes in foreign exchange rates.
Example: E-commerce companies often set their prices using a base currency, such as U.S. dollars. E-commerce stores may then account for real time data to change prices based on exchange-rate changes. A company might even use a special dynamic pricing tool to automate this process.
Pros and Cons: Exchange-rate pricing is among the best practices for operating in foreign markets because it allows companies to remain competitive in the various countries they serve. Of course, making the necessary adjustments can require constantly monitoring exchange-rate changes. This may be time-consuming and can potentially lead to confusion if mistakes are made.
How to Implement: Choose a base currency for your products or services. Set prices based on that currency. Then, establish a system that allows you to easily track exchange-rate changes in the other countries where you may do business. Once more, you might find dynamic pricing algorithms or tools that allow you to make these price changes automatically.
11. Time-of-Use Pricing
Time-of-use pricing is similar to peak pricing or surge pricing in that it involves changing prices based on when customers use a product or service. However, this time-based pricing may account for the time of day when customers use a product or service, and not just the time of year.
Time-of-use pricing is slightly different from surge pricing because it usually doesn’t involve changing prices based on real-time data. Instead, it tends to involve changing prices according to a set schedule throughout the day.
Example: Utility companies often use time-of-use pricing. During times of day when many customers may be using electricity, prices for electricity may be higher. This may also be considered a form of demand pricing.
Pros and Cons: Practices like surge pricing (which is still similar to time-of-use pricing in some ways) are common because it simply makes sense to charge more for a given service or product when demand for that service or product is highest. This type of dynamic pricing model could also give customers reason to use a product or service at times when doing so is less costly not only for them, but also for the company. However, time-of-use pricing can result in a pricing structure that many customers find confusing.
How to Implement: If you offer a product or service that customers might use more often during some times of day than others, try adjusting your pricing model so that customers pay more during the busiest times.
Be sure to monitor the impact this has on customer behavior. For instance, these changes might result in more customers beginning to use your products or services during less busy times of day. While this is acceptable, it’s not acceptable if these changes result in losing customers.
The information here is very general. Sometimes, the best way to understand the value of dynamic pricing is to learn of a specific example from a small business owner.
For instance, I have a friend who sells her own handmade jewelry. Demand for her products can be particularly high during the holiday season. Greater demand can increase her overall labor requirements and her supply costs. Because of this, she has learned to adjust her prices during different times of year. Doing so ensures her prices remain fair both for her and for her customers.
That’s just one personal example. The main point is to understand that dynamic pricing strategies serve to keep profit margins steady.
Do you own a business? If so, test out some of the strategies here. Experimenting with them can help you determine how to set flexible prices that satisfy everyone.
Although millions of people visit Brandon's blog each month, his path to success was not easy. Go here to read his incredible story, "From Disabled and $500k in Debt to a Pro Blogger with 5 Million Monthly Visitors." If you want to send Brandon a quick message, then visit his contact page here.