What is dynamic or variable pricing?
Pricing can be considered dynamic when a company utilizes advanced solutions or systems to forecast demand and control the availability of different price points to optimize revenue. This means that the price of a product or service varies over time, depending on actual demand and supply. Businesses can also decide to use multiple price points for their product or service without advanced systems. This kind of simpler and less dynamic approach to pricing could be best described as variable or active pricing.
Where and when is dynamic pricing used?
Traditional use cases for dynamic pricing abound in the travel industry, where capacity is somewhat restricted (fixed number of hotel rooms), the inventory is perishable (you can’t sell a ticket on yesterdays’ flight) and demand for the service is not stable over time (much more demand for flights or hotel rooms around Christmas than a regular Tuesday). Customers also have different underlying needs and differing willingness to pay for a service. Smart businesses understand this and design their service offering and pricing to cater to the needs of a larger potential target audience.
In recent years also other service companies have begun to utilize pricing models with varying levels and dynamism. Consider a few examples from the Nordic markets.
Case examples from the Nordic markets
One of the leading Finnish grocery chains has invested into online shopping for several years, with home deliveries and drive-in pick-up points at selected stores especially in the largest cities. The collection & and pick-up of groceries costs 3,90-6,90€ depending on the chosen 3-hour time slot, with higher fees for slots with the most demand. The grocery chain can offer lower fees to customers with more flexibility in terms of when they are able to pick up their shopping, and maximize revenue for the slots which are in highest demand.
Cheaper price points can also be utilized as attractive “starting from-fares” in advertising. One new example of this is a car inspection chain which uses low fares in their marketing. These lowest fees are only available for inspection times during working hours (not around lunch time, though). This makes sense: a price-sensitive customer with the flexibility to book a 10:30 AM slot gets it for reduced price, and the car inspectors can serve more customers. When using starting-from fares a business should make it easy for a potential customer to see when the service is offered for the starting from-fee, and availability should be sufficient so that potential customers do not feel cheated or disappointed if they find only extremely limited availability.
A Finnish indoor trampoline park chain campaigned a form of dynamic pricing in the summer of 2018. The park launched their summer campaign “The hotter, the better” in early June, after a month of unusually warm weather in May. The trampoline park had probably experienced a drop in visitors during May, and thus had designed a summer campaign to attract visitors also during warmer summer days. Discounts were tied to outside temperatures: when temperature was 21 degrees the discount for the entrance fee was 10%, at 22 degrees 20% and so on, until if temperatures exceeded 30 degrees entrance was completely free (-100%).
The summer of 2018 turned out to be record-hot and the park ended up giving over 50% discounts for all of June and July, with several days with completely free entrance. What seemed like a fresh and visually attractive campaign turned out to be counterproductive. Families exhausted by weeks of record-high temperatures during their summer holidays turned to cool indoor parks for comfort. At the same time the business had given away control for their most efficient profit lever – their pricing.
All businesses with restricted capacity, perishable inventory, fluctuating demand and customer segments with different underlying needs and differing willingness to pay can look for ways to utilize some form or degree of dynamic pricing to cater to the needs of a larger potential target audience and optimize their revenues. Just make sure you are in control of the variables affecting the prices offered and are not at the mercy of weather patterns!
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At Capacent, we have one common denominator in all of our pricing projects – creating tangible results for our customers. Typically we aim to achieve 4-6% EBIT improvements in addition to enhancement and clarifications of current pricing structures and policies.
Nora Härme is a Senior Manager and the Pricing Lead of Capacent Finland. She has 15 years of experience from Revenue Management & Pricing within passenger transportation, both air and rail. Our Pricing team combines pricing experience with strong BI & analytics to tackle customers’ pricing challenges all the way from defining, planning and piloting to hands-on implementation.
Lotte Kylberg is a Senior Manager at Capacent Sweden and is head of the Capacent retail team. She has 15+ years of consulting experience and a background as an e-commerce/retail entrepreneur. She has managed projects developing and implementing strategic pricing and value propositions in a wide range of industries, e.g. digital services and software, manufacturing, wholesale and retail, rental and professional services.