Most pricing methods are fixed. However, for some companies and in certain situations, dynamic pricing provides notable advantages and benefits. This pricing method is a pricing strategy that involves using variable prices instead of fixed prices. The price of a particular good or service is fundamentally dynamic or it changes depending on different variables.
Pros: Advantages of Dynamic Pricing
The main advantage of a dynamic pricing strategy is that it takes into account changes in market conditions in determining prices. This cushions businesses from possible losses and other risks that come from the ever-changing market or seasonal demand.
Below are the specific benefits of this strategy:
• Achieve Better Profit Margins: Leaving the price as it is can have a negative impact on the earnings of a particular business during market downturns. Fixing the price according to the market condition allows a business to maximize its earning potential and achieve better profit margins regardless of the season.
• Considers Supply and Demand: Another advantage of dynamic pricing is that it takes into consideration the level of demand versus the level of supply. High demand and low supply entail high prices. Low demand and high supply result in high prices. These variations can help businesses achieve their revenue targets better.
• Better Inventory Management: This pricing strategy can also influence the management of inventories. Overstocked products can be sold at a discount to hasten their disposal while understocked products would be sold at a higher price and compel the producer to build stock to normalize its price.
• Adaptability and Flexibility: Responsive pricing makes a business adaptable. Revenue targets remain achievable during lackluster sales or low-demand seasons. A business can compete with other similar businesses by lowering its price during periods of high demand and intense market competition.
• Generates Consumer Insights: This pricing strategy can also help businesses generate insights about their customers by taking into consideration their bargaining power. Adjusting prices can help in determining the minimum and maximum price a customer is willing to pay in a particular period or season.
Cons: Disadvantages of Dynamic Pricing
Regularly adjusting prices according to market conditions is complicated. This is a major disadvantage of dynamic pricing. Businesses need to have relevant capabilities to adjust and set their prices as fast and efficiently as possible.
Below are the specific drawbacks of this strategy:
• Requires Technical Capacities: Companies that use this pricing strategy such as airliners, hotels, and mobility-as-a-service providers collect and analyze different data to determine the prices of their services. Note that Uber uses artificial intelligence and machine learning to efficiently adjust its fares and rates.
• Negative Consumer Perception: Another disadvantage of dynamic pricing is that it can create an unfavorable perception from the consumers. Some might think that this strategy is exploitative and opportunistic. Fixed prices for regularly purchased goods and services give customers a semblance of control and assurance.
• Allegations of Price Discrimination: Some consumers might also feel that this pricing strategy favors particular consumers. Amazon was accused of setting higher prices in certain locations and for specific buyers. Drivers and riders of Uber have been accused of refusing to accept bookings prior to the price surge.
• Possibility for Gaming the System: Consumers can also game the system. Some have found a workaround to land cheaper airfares via the online ticketing systems of airliners using virtual private networks and private browsing. Consumers can plan their purchases around the predictability of price adjustments.
• Not Applicable to Others: This strategy is also not applicable to certain businesses. Producers in certain market structures such as perfect competition and monopolistic competition cannot change their prices due to government regulations and without the risk of losing consumers to competitors.