Dynamic Pricing: Investigating the Pros and Cons

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Pricing is very strategic and it makes a big difference in how a business operates. Some businesses operate on a fixed pricing model where the price point is relatively set in stone across the board. An example of this would be the iPhone. They generally are sold with a fixed price strategy and rarely veer from this. On the other hand, dynamic pricing allows the price of a product to strategically fluctuate and change over a period of time.

Before jumping into this pricing option, make sure you understand the pros and cons of selling off your inventory stock like this.

What is dynamic pricing?

Businesses implement dynamic pricing as a type of price discrimination. This allows businesses to change the price of a product based on a number of variables such as the market conditions or varying components within the business. With dynamic pricing, you can change the price your business charges for a product or service to reflect differences in market conditions and seasonality. For instance, flights to different places are always more expensive around Christmas. This dynamic pricing model allows airlines to charge a higher price at a time of greater demand.

Advantages of dynamic pricing

Increase your sales

Dynamic pricing can drive prices in both directions. Businesses can increase the prices to capitalise on demand, but they can also lower prices to try and increase sales. If you put a price drop on a product, this can get the product moving. Try these methods to help you get rid of old inventory stock or dead stock.

Learn more about your customers

Dynamic pricing allows you to analyse the demand curve for each customer. The process becomes easier because the demand curve can more accurately display what minimum and maximum price customers are willing to pay for certain products. You can get more data on customer behaviour patterns when using a dynamic pricing model.

Keeps you competitive

When you use dynamic pricing, this allows you to stay competitive in the market. If a carpark is charging early bird rates of $6, you could lower your pricing on a different nearby carpark to undercut a nearby competitor. This helps you stay on top of it in the market and drive customers in your direction.

Disadvantages of dynamic pricing

It can spark a price war

Being competitive is important but it can also spark a price war. Neighbouring carparks or petrol stations experience this all the time. At some point it becomes unsustainable and the business has to backtrack to make sure they are operating at healthy levels.

Frustrated customers

Sometimes when prices are changing all of the time, it can be annoying, frustrating and inconsistent for customers. You want them to trust your brand. If they can’t figure out your erratic pricing strategy, they might lose their brand loyalty.

Lost business

If you are using dynamic pricing to drive prices up and trying to capitalise on demand, customers might turn the other way — there are plenty of other shops and online retailers for them to go to. Don’t get too greedy and make your dynamic pricing a turn off for customers.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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