Have you ever tried booking the same hotel at different times? Have you ever checked flight tickets for the same flight on different days? If yes, you might have noticed the pricing for the same service was different at different times. This is dynamic pricing used by businesses, especially in the hospitality and travel industries.
What is dynamic pricing?
During the earlier times when there was no penetration of technology and data, businesses used to work on simple static pricing for their products and services. They had a fixed set pricing for all their products which the customers could purchase. At any given point in time, the pricing would be the same. This would be unless the price of the product is changed altogether.
Though this worked for many, some industries had a bad effect in terms of revenue. This is mostly because of the seasonality of these businesses.
Consider an example of a hotel chain with properties in the tropics. These properties are mostly located on lush beaches facing the blue oceans. Naturally, the peak season of revenue generation for this hotel chain would be during the summer and winter holidays. Most of the tourists would come during this period throughout the year. But it would experience less business during the monsoons.
Had this hotel chain worked on the static fixed pricing throughout the year, irrespective of the demand, they would have lost the opportunity of earning good revenue.
This is what dynamic pricing is about. It is a strategy used by businesses where they adjust the price of products or services based on various factors in real-time. This strategy allows the business to respond to the supply and changes in the market so that they can maximize their revenue. This is generally used by industries like travel, hospitality, and e-commerce.
Factors influencing the pricing
The product pricing is dependent on various factors.
Demand and supply
Demand and supply are the basics of any economy. These are the factors that determine the pricing of many products.
The point where demand and supply are balanced is known as market equilibrium. This is the state where the buyers are satisfied with the price customers pay and customers are happy with the price they are paying. When there is an imbalance in either of them, prices change.
When there is a demand in the market with the supply being constant, customers are willing to pay more price for a product. Similarly, if there is less demand and there is constant supply, customers are not willing to buy. To cope with this, the pricing plummets.
Time
In many industries, prices change with the time a customer books. Typically businesses tend to offer discounts to the customers who are making their bookings early. Conversely, the customers making their purchases at the last moment have to pay more.
This is a typical case in the airline industry. Normally, the people who book their tickets early are the ones planning for vacations or unofficial needs. They tend to opt for discounts in the deal. Customers booking tickets at the last minute are normally business customers, and the business needs for the day are more important than the pricing. Hence they are willing to pay a hefty amount for the tickets.
Seasonality
Many industries experience peaks of high demands and low demands during the year.
This seasonality can be because of factors like:
- Holidays: The tourism industry has peak season during summer and winters
- Weather: The Fashion industry has seasonal clothing
During the peak seasons, they may increase the pricing because of high demand. Off-seasons experience a lowering of pricing to attract more customers in that period.
Competition
When there is intense competition, companies might engage in price wars. This effectively lowers customer pricing.
When businesses try to build differentiation of their products, they tend to keep the pricing high to justify it.
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