What is dynamic pricing?

Have you ever planned a holiday, looked at the cost of flights one day and then, a few days later, noticed that those same flights have dramatically risen in price? 

These vagaries can be frustrating to customers but are common across many industries.

After all, the purpose of any business is to make money and maximize profit.

That’s why dynamic pricing like this is so familiar. 

But what is dynamic pricing exactly, and how can you use it to your advantage in your business? 

What is dynamic pricing in marketing?

Dynamic pricing is highly flexible and liable to change on a day-to-day basis. It’s also known as time-based pricing, demand pricing, or surge pricing.

Contrary to that dynamic pricing definition, with static pricing, the cost of a service or product remains constant and rarely changes. 

Another simple definition of dynamic pricing is that it’s a strategy where organizations adjust their pricing to take demand and other factors into account. 

It doesn’t suit every business type.

Restaurants, for example,  will not usually adjust prices because of changes in demand, but an airline or hotel company certainly will. 

Dynamic pricing shouldn’t be confused with variable pricing, which covers things like auctions and stock markets.

What are the types of dynamic pricing models?

1. Segmented pricing 

With segmented pricing, you have different prices for similar products.

You do this when you have segmented customers who perceive the value of your product in different ways. 

Think sports teams, music events, and airlines. There are three factors to consider with this pricing type:

  • Location. Does the location of your business—or the location of your customer—mean that you can consider a dynamic rate for your products or services?
  • Customer demographics. Are certain demographic segments of your customer base more likely to purchase from you and allow you to use dynamic pricing?
  • Product/service type. Do you offer different versions of the same product? For example, you may offer physical or digital versions of that product, allowing you to adopt dynamic pricing. 

2. Time-based pricing

With time-based dynamic pricing, you adjust prices according to the time that the product is provided. 

With this model, you can dynamically price up or down according to what you see as demand and need. An example of dynamic pricing down would be in persuading a customer to buy now rather than later. 

Your business may choose to use time-based dynamic pricing if your customer wants same-day delivery.

Alternatively, you can charge less for slower delivery or for preorders. You may also want to use dynamic pricing in pricing proposals to close B2B deals. 

3. Peak period dynamic pricing 

This form of dynamic pricing recognizes that there may be times of the day, week, month, or year when there is greater demand for the products/services you provide and that you can charge customers more at these peak periods. 

This model is used extensively in the hospitality industry; hotels and airlines will increase their prices when there is the greatest demand, such as during school holidays. 

What are some dynamic pricing examples?

Examples of dynamic pricing can be found everywhere:

  • Hotels. If you look at hotel prices over a year, you will see a massive fluctuation in room rates. They tend to be very seasonal and will adjust rates because of this. For example, hotels in Southeast Asia will charge more from December to April as that is the region’s high season. 
  • Utility companies. You will often find that utility companies will reduce rates when there is less demand (such as during the typically hotter summer months), then raise them again when demand soars in winter. 

What is one benefit of dynamic pricing?

Dynamic pricing allows you to sell your product or service year-round.

When demand is high, you charge more and maximize your profits, but when it drops, you can lower prices to persuade customers to buy. However, be careful to avoid pricing mistakes

Is a dynamic pricing policy fair?

Generally, people do accept that they have to pay higher rates according to demand and time.

As long as your dynamic pricing policy is not seen as manipulative or exploitative, then it should generally be perceived as fair by your customers. 

How to implement a dynamic price strategy

1. Set goals

Why do you want to use dynamic pricing, and what are your objectives? 

Is the purpose to price downwards to cover periods of low demand or to maximize profit in times of high demand?

Or both? Knowing why you want to use a dynamic pricing model can help with implementation. 

2. Pick a strategy

Once you know your goals, it’s easier to pick a pricing strategy that will help you achieve those goals.

Identifying the whens and whys of increased or decreased prices can help you decide just how dynamic your pricing is.

Be sure to track metrics to ensure your strategy is working in your favor. 

3. Set pricing rules

Establish a set of rules that govern dynamic pricing strategy. 

What decides when the price of a product goes up or down?

Are you following seasonal patterns or just looking at how well a product performs? You should also have rules on how much a product increases or decreases in price. 

4. Use tools 

Dynamic pricing is difficult to implement manually. Look at the automation tools available to make things easier.

You can use the rules you have established to set dynamic pricing patterns but remember to monitor how well the strategy works in case changes are needed. 

PandaDoc can help, too. Our PandaDoc CPQ feature lets you pre-configure offerings and prices to individual prospects and clients.

Document workflow automation, too, gives your team the time to concentrate on business critical things like pricing strategy.  

Utilize dynamic pricing to maximize your profit

So, what is dynamic pricing?

It can be a great way to maximize profits by recognizing that customers place a higher value on your products at certain times or in certain situations. 

It can also be of great use in B2B negotiations when you want to close a deal. Why not try PandaDoc’s proposal software features and include dynamic pricing as the cherry on top?