In a dynamic pricing model, companies constantly adjust prices to optimize margins on the one hand and sales opportunities on the other. Through this pricing strategy, companies look for the price that customers are willing to pay at a given moment. Dynamic price optimization takes into account available inventory, time of day, day of week, expected demand, and other insights that affect price (e.g. weather, competitive prices, etc.).
In which industries does dynamic price optimization applied?
Dynamic price optimization is applied in many different sectors and in many companies. It is commonly used by airlines, hotels, valet parking and online retail.
- Aviation: Many airlines use a dynamic price building with different price points. These price points are based on market characteristics such as (holiday) season, day of departure/arrival, time between booking and departure, competition and capacity (stock of seats).
- Hotels: Hotels, large and small, use dynamic pricing to offer the right visitors the optimal price. Usually this is related to the season, holidays and the scarcity of rooms in the hotel or nearby. The price also depends on the type of visitor. Increasingly you see that hotels segment and look at the total revenue of a customer. The room, the use of the bar, the restaurant or other possibilities.
- Parking: Dynamic price optimization is also successfully applied in parking lots of airports, for example. Seasonal patterns are of course taken into account. Segmentation is also important here. Even in periods when there are fewer passengers and therefore less parking demand, there are specific target groups that have a high need and therefore have a greater willingness to pay.
- Media: With media operators, for example Out of Home companies, it is important to sell the available stock of commercials at the right price. Dynamic price optimization looks at available inventory, booked campaigns and expected demand. Based on the specific question, duration and time of the campaign, budget or range, the quotation is composed based on the available spot and associated price point.
Benefits of Dynamic Price Optimization
Dynamic price optimization has many advantages. By relating the available stock to the market demand, it is possible to actively steer towards offering the right price at the right time. Active management increases sales by raising prices if possible and by stimulating sales when necessary. Another advantage is that there is continuous insight for all involved into the development of the stock on the basis of which active management can be done. Sales can be stimulated in a timely manner through marketing campaigns.
- Insights: The data that you collect to determine the dynamic pricing also provides insight into the commercial development. This allows you to use a wide range of instruments (marketing, sales, stock) to achieve better results.
- Stimulate sales: The dynamic price optimization gives you more insight into the behavior of your customers. By collecting and analyzing the sales data from different price points, you gain more insight into how much demand there is from which customer segment and at which price point. Dynamic prices are usually associated with price increases. But the opposite can also be true. Sometimes it becomes clear that you need to sell your inventory faster. This is possible, for example, by offering a lower price for a short period of time. This is usually done by companies or departments that need to meet a specific sales target by the end of the month or year.
- Price optimization: With the help of dynamic price optimization you can optimize margins. By increasing or decreasing the price for certain products in combination with better inventory utilization, we see that sales can increase by 10% to 20% without leading to an increase in unit costs.
Disadvantages of Dynamic Price Optimization
There are certain drawbacks to dynamic pricing that you should keep in mind when implementing it in your business.
- Dissatisfied customers | Customers want to feel that they are paying the right price for a product. When they notice that the prices of products change too much, they may end up feeling cheated. This can happen before they make a purchase, but also when they have already made the purchase and then see a lower price.
- Dissatisfied customers | Customers want to feel that they are paying the right price for a product. At the same time, an organization will also have to adopt and internalize the change. This takes time and attention.
- The risk of a price war| When competition also applies dynamic price optimization and people have insight into each other’s prices, this can lead to the ‘spiral of death’. This is a phenomenon where competitors start to price lower and lower in order to maintain market share and ultimately no healthy margin is left. This can be prevented by determining and implementing good policy in advance.
RevenueMindz has extensive experience with the implementation of dynamic price optimization in aviation, parking and media, among others. Would you like to learn more? Let us know!