Dynamic pricing is a controversial topic that has been talked about a lot in the past few years. Technological progress and advanced artificial intelligence (AI) algorithms enable companies to constantly track customer purchase behavior and base their decisions on it for the sake of profit. Amongst the benefits of AI for digital marketing is the ability to automatically change prices based on real-time data.
However, while this tactic enables businesses to boost their revenues, if there isn’t a level of subtlety involved, the changes don’t stay unnoticed by customers and may leave a bad taste in their mouths. With many large companies such as Amazon and Uber exploiting the dynamic pricing model, customers are now on their guard about such price tactics.
In this article, we’ll list 7 ways to improve your revenue by strategically adjusting your prices without disregarding the customer and hurting your reputation. So read on and take notes!
What Is Dynamic Pricing?
Dynamic pricing, also known as surge pricing and demand pricing, is a type of pricing strategy where the company uses flexible pricing that changes according to market demand and other business environment factors.
Businesses analyze customer behavior trends and patterns, cross-reference them with other marketplace and economic events, and carry out price changes in accordance with the business environment.
There are different strategies that fall into the dynamic pricing category:
- Time-Based Pricing. This is when the price varies based on the time of the day.
- Segmented Pricing. In this approach, the item’s value is influenced by the customer’s profile, location, etc.
- Peak Pricing. Demand is the key factor that defines the price fluctuations in this type of dynamic strategy.
- Penetration Pricing. When products are presented to a new market, the price may be decreased to encourage adoption.
- Changing Conditions Pricing. In this strategy, businesses change the product’s pricing based on other market factors that affect customer behavior.
Dynamic pricing can be implemented manually by building a model, responding to the business’s needs, or they can be automated. Both options are viable and have their benefits.
However, even with automated dynamic pricing, organizations retain hands-on control over the process. They can choose the relevant variables they want to apply, and set up constraints.
Why You Shouldn’t Abuse Dynamic Pricing
While dynamic pricing, combined with the power of modern software, offers a myriad of opportunities to boost revenue, the ethical issues that may arise pose a major risk to your reputation. It’s fine for companies such as Amazon or Uber to lose a few hundred customers because of it and blame it on a mistake by the algorithm. However, a similar event may cause a full-blown customer service disaster for a small retailer, and can, potentially, lead to a loyalty crisis, and even put you out of business.
Companies should avoid exploiting customer information for profit and be careful not to cross the border with price discrimination.
Businesses that mess around with their prices too much and obviously abuse the strategy usually drive customers away, because they leave them with the feeling of being cheated or taken advantage of.
Nevertheless, there are ways to use dynamic pricing that benefit both the customer and the business and, in this article, we will focus on those.
Ways to Boost Revenue with Dynamic Pricing
The key behind ethically using dynamic pricing is transparency. By setting clear, logical, and accessible rules about why a product may fluctuate in price, customers are less likely to feel frustrated.
For example, if you visit an oriental street market on your travels abroad, you may not see a single price tag. The merchant negotiates the price with each customer and the customer is aware that they are supposed to haggle. In the end, the goal of the interaction is to make each side feel satisfied with the deal they made.
However, both sides know that the price is not fixed. The customer won’t be happy if they meet a friend who sealed a better deal, but they probably won’t feel that angry, because it was always an option.
Many people feel that online dynamic pricing is pretty much the same. However, there is a thin line between knowing that you are playing a game, and understanding that you’ve been played subsequently. If the customer doesn’t know the rules, it’s not fair game.
Furthermore, while your ultimate goal is to increase revenue, this shouldn’t come at the cost of your integrity and your audience’s trust in you.
1. Regularly Conduct Pricing Research
Pricing research is the best way to understand how your customers feel about your prices and how much they are willing to pay for your products. It enables businesses to make informed decisions and base price changes on data, customer behavior, and marketplace trends, rather than on random events.
By using data to guide your moves, you may not only justify price changes to stakeholders and clients, but you can minimize the risk of mistakes.
Pricing has always been a sensitive topic. However, nowadays, customers have the resources to research competitor brands, compare offers, and make informed choices, and this makes it even more complicated for businesses. If you change prices just for the sake of it, you may lose your audience’s trust for good.
Pricing research enables you to analyze different variables and find the golden mean where both you and the customer are happy.
2. Make Seasonal Discounts
Discounts are tricky to tackle, because they may hurt the customer’s perceived value of the product. However, when they are justified and not randomly applied, they may help businesses boost sales volume.
Seasonal discounts are a great example of dynamic pricing, and can easily be automated based on the product’s feasibility.
For example, it’s completely acceptable that summer clothing is sold cheaper at the end of the season. And both sides benefit from this type of deal. Businesses can make sure that they sell as many items as they can while they are still relevant and in fashion, and free up space for their new collections. At the same time, bargain-lovers can have a field day. Even the customers who shopped the collection at the beginning of the season, don’t feel disappointed because they’ve had a whole summer to enjoy the product.
Other special promos such as Black Friday, Cyber Monday, Amazon PrimeDay, or, for example, your company’s birthday, are exclusive events that also call for a price change, without devaluing the product.
3. Create Demand with Limited-Time Offers
Dynamic pricing is a great way to create demand for new products or penetrate a new market.
For example, if you are launching an innovation, you may announce that early adopters can buy the product for a lower price. This way, you create demand and give sales a head start. Meanwhile, customers who are ready to risk it with an unfamiliar solution, are happy to make a good deal.
To ensure there are no misunderstandings, you should calculate what demand is sufficient for you, and set a number. Your offer may sound something like – “Limited time offer! The first 500 customers get 15% off!” Once you reach this number, you switch to RRP.
However, if, for example, your audience gets over-excited about the product and you reach this number sooner than expected, you may announce that you are extending the offer due to the unexpected interest. This way, you will create even more hype around your product, because when people hear that something is in high demand, they often feel compelled to give it a try.
Furthermore, once you return to RRP, your customers are less likely to be disappointed, because they knew the offer was limited.
4. Granulate Your Pricing Strategy
Depending on the type of product you provide, you can consider different pricing models that enable a flexible approach. This strategy is most suitable for digital solutions, but can, however, be adapted to various other services.
For example, if you are using a subscription-based business model for your products and services, you can charge per user, per usage, or create tiers for businesses of different sizes. This way you will offer dynamic pricing based on the client’s needs.
Your customers will be happy because they will get exactly what they want in terms of product usage, and won’t be charged for features or services they don’t need. You, on the other hand,
will ensure that you seal more deals and boost your revenue.
5. Balance out Supply and Demand with Strategic Pricing
Dynamic pricing can be used to manage the supply-demand equilibrium. The two curves have to be in balance to function properly, and by changing how much businesses charge for a product, they can control sales volume.
For example, if you are manufacturing a product and there is a sudden surge in sales you may struggle to keep up with supply. However, if you don’t deliver, you will start losing clients and profits. Slightly increasing the price will reduce the load but keep revenue steady.
Once the sales drop, you may think of a feasible reason to launch a discount and boost sales volume again, or even announce and market a new lower RRP.
6. Encourage Bundle Shopping
Depending on the type of product you sell, bundle shopping is a great way to introduce dynamic pricing. It’s completely understandable that a client who buys 5 items deserves a reduced price, compared to someone who buys only one.
With bundle deals, you encourage your audience to buy more in order to pay less. Of course, both of you know that they are still paying more. Nevertheless, the customer is happy because they feel they are making a good deal, and you are happy because you are making more sales and revenue.
7. Create Loyalty Programs
Loyalty programs are a subtle way to introduce dynamic pricing into your strategy. The more customers that shop with your brand, the better discount they get.
Similar to bundle shopping, this tactic encourages your clients to make more transactions in order to obtain better value. It’s a win-win scenario, because the benefits the customer receives make them feel special and valued, and encourage them to make more purchases.
For example, if a client spends $300 with your brand, they get a 5% discount, when they spend $600 the discount jumps to 10%, and so on.
In the past, the value of the product was either pre-estimated and fixed or decided by the seller at the moment of the purchase based on their assessment of the client and the situation. Nowadays, the process is more complex.
The ever-changing market dictates that businesses should respond to the customer’s needs and adjust their prices based on how much the customer is willing to pay.
If done with subtlety and transparency, dynamic pricing is an effective strategy to correlate your sales approach and your product’s value to the market’s trends and behavior changes.