How to Reap Higher Profits with

Dynamic Pricing

Dynamic pricing, in which prices adjust in real time or near-real time to supply and demand
factors, is gaining traction in a variety of industries, including apparel, vehicles, consumer
electronics, personal services (such as haircuts), telecommunications, and second-hand items.
With the introduction of the Internet, cost transparency, lower search costs, and easier price
comparison became possible.

After all, fixed pricing are a relatively new phenomena, having emerged as a result of mass
manufacturing after the Industrial Revolution. Fixed prices were the anomaly before that
event; DP was the rule, with many DP transactions benefiting both the buyer and the seller.

There are four main reasons for the increased use of DP today:

 More enterprises can now acquire and employ DP technology in new product and
service categories at affordable pricing.
 Consumers will adopt DP with the correct approach, according to recent research,
even if they are currently buying at fixed rates.
 Companies are looking for new ways to extract value and reallocate demand as
pricing pressures and supply restrictions increase in various industries.
 Many organisations (having already integrated upstream supply chains with their
operations) are now focusing on the downstream element of their operations, where
DP is a natural result.

Forms of Dynamic Pricing

There are two types of DP: posted prices that customers may see and price discovery
processes, in which customers set pricing based on their own actions during the transaction.

Of fact, posted prices are a type of fixed price. Companies fix the posted price of a product or
service for a long time for a variety of reasons, including a lack of accurate demand
information, high transaction costs associated with constantly changing prices, and the
significant investments required for the software and hardware required to implement DP.

Eight Situations For Using Dynamic Pricing

The bigger the market, the larger the number of customers and the greater the number of
transactions, the greater the op- portunity for DP.

The more the customer is involved in the process, and the greater the heterogeneity in
valuation that customers put on the same service, the greater the opportunity for DP to
reallocate and manage demand.

Products and services that have a well-defined shelf life (that is, they eventually become
obsolescent) are amenable to the use of demand-based DP, even if they are not perishable
in the conventional sense but nonetheless have a salvage value.

The more that a company needs to sell excess or reassigned inventory, the greater the potential
role for DP.

The greater the possibility of using one-off transactions to obtain inputs for production, the
greater the potential use of DP (specifically, reverse auctions).

Where the final price has little relation to cost and the product can be viewed and evaluated at a
distance, DP methods such as auctions can be used to determine a price range.

Where there is a need to recover money quickly for im- proved cash flow, a DP method such as
negotiations can be very useful.