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For better or for worse, dynamic pricing has become a common method that allows businesses to adjust their prices in real-time in response to customer demand. Often, these prices are altered automatically based on algorithms that take into account supply, competitor pricing, and even individual customer behavior. In this article, we’ve explained how dynamic pricing has helped businesses to maximize revenue, and whether this is a sustainable business model.
The Art of Dynamic Pricing
Also known as surge pricing or demand-based pricing, dynamic pricing is a strategy where a product or service’s price is flexible. Unlike traditional fixed pricing, dynamic pricing allows businesses to respond to market conditions, with the optimal price point shifting at any given moment to lead to increased profits.
While the strategy has applications in numerous sectors, it isn’t a one-size-fits-all solution. For example, when users play roulette online, they expect that their funds will have the same value at all times, with payout statistics unchanging. Instead, some roulette titles will offer shifting payout multipliers that can see wins surge at random.
The Tourism Sector
One of the most notable industries to embrace dynamic pricing is the airline sector. Consumers have long been privy to the fact that ticket sales can alter according to the day of the week, promotional periods, holiday periods, and the length of time until the scheduled flight.
For example, a ticket for a flight from New York to London might cost $500 if purchased months in advance but could increase to $2,000 if bought a day before departure. Prices are often adjusted according to an algorithm that accounts for historical data, competitor prices, and current booking trends. This allows them to fill seats that might otherwise go empty, maximizing airline profit potential.
Additionally, the hotel industry has long relied on the strategy, which is often referred to as “revenue management”. This sees room rates adjusted based on factors such as local events, occupancy rates, and seasonality. This can see mid-range rooms in Las Vegas be as low as a tenth of a price on an off-season Tuesday than on New Year’s Eve.
Concerts and Events
In recent years, the events industry has been trialing dynamic pricing models to sell concert tickets. Like the airline industry, the prices can adjust according to customer demand. Promoters can set a low-value and high-value price set, with individual tickets priced somewhere along this scale depending on the demand.
However, this has been controversial, with a recent dynamic pricing scandal angering Oasis fans when tickets unexpectedly doubled in price. This has sparked an investigation into whether the practice is unfair, emphasizing the need for businesses to not value profit gains too high above consumer satisfaction.
Real-Time Price Adjustments in E-Commerce
Online retailers have also exhibited how profitable dynamic pricing can be. For example, Amazon has a reputation for changing product prices multiple times per day. Their huge trove of consumer data helps them gauge consumer habits to their benefit, with a complex algorithm also considering competitor pricing, inventory levels, and the time of day.
The Future of Dynamic Pricing
As the digital economy further matures, we expect dynamic pricing strategies to be adopted by even more diverse sectors. The advancement of machine learning will further enable businesses to maximize profits, though they must be aware of navigating regulations surrounding customer fairness.
