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When does it make sense to apply dynamic or variable pricing?

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 below.

Read more: How to profit from dynamic pricing in any business

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 the 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 that uses low fares in their marketing. These lowest fees are only available for inspection times during working hours (not around lunchtime, though). This makes sense: a price-sensitive customer with the flexibility to book a 10:30 AM slot gets it for a 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.

The takeaways?

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!

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.

Authors

Nora Härme is a pricing & revenue management professional and former Capacentian who played a key role in setting up the Pricing practice at our Helsinki office during 2019-2020. She currently works for Terveystalo.

Lotte Kylberg is Senior Manager and Pricing Lead at Capacent_x in Sweden. Lotte has 15 years of experience from developing and implementing strategic and tactical pricing with clients in a wide range of industries, such as industrial manufacturing and trade, business services, rental, retail and MedTech.