Dynamic Pricing vs. Rules-based Pricing: What's the Difference?

Pricing practitioners’ most pressing challenge is knowing when to make price changes and being able to effectively deploy those changes into the field in time to realize those price improvement opportunities.

Rules are the building blocks of pricing. Though the traditional method of applying rules, created in spreadsheets, to manage pricing is prevalent in many industries, it often lacks the flexibility and sophistication to be able to react to market changes.

However, more and more companies in fast-paced markets with “perishable” inventory are now leveraging Dynamic Pricing systems that can learn and alert them to pricing opportunities and potential pitfalls at the speed of modern commerce.

In this post, we’ll cover how traditional rules-based pricing differs from a Dynamic Pricing approach powered by machine learning (ML) and artificial intelligence (AI).

Rules Rule Pricing

Industries like Airline, Rental Car, Hotel, and Cruise Line set and publish millions of prices for thousands of perishable products, across 365 days – which is a pretty daunting task. In fact, there is a literal science dedicated to the creation of pricing rules and how they are applied in a timely manner -- it is called Yield or Revenue Management.

Rules-based pricing is the default methodology in traditional revenue management and though these rules provide some control, with increased complexity they often breakdown. Not to mention that the time required to adjust rules inherently means that new prices will be out-of-touch with current market conditions and customer willingness-to-pay. This leads to a significant loss of revenue and smaller profit margins. This approach necessitates companies to expend massive amounts of time and manpower to monitor price performance and compliance with varying degrees of success.

These legacy systems start with prices set by the pricing team at HQ and require large teams of revenue managers to apply the rules and manage exceptions to set published prices and availability. There are many inefficiencies, chances for human error, and the forecasting and re-optimization of prices takes hours in this model. This approach was revolutionary at one time and though it worked reasonably well in the early years of eCommerce, the exponential growth in the digital economy and consequential impact it has had on consumer buying behavior makes these traditional systems far too unresponsive for today’s market.

Pricing at the Speed of Modern Commerce

Dynamic Pricing is a powerful growth and profitability tool gaining more acceptance by sellers and buyers alike. A Dynamic Pricing system can help make the right inventory available for the right customers, in the right channels, at the right time - this is a win-win situation for all, as Dynamic Pricing provides more choices and availability of products and services.

In B2C, poor pricing practices can lead to bankruptcy. Toys-R-Us famously refused to price match Target and Amazon, costing it valuable customer loyalty and ultimately leading to its downfall. For companies selling expiring goods, failing to dynamically price can be even worse. Event producers/promoters, movie theaters, and car rental companies, to name a few, have embraced Dynamic Pricing to solve a variety of issues from low utilization to customer satisfaction.

Using AI to solve Dynamic Pricing

AI-powered Dynamic Pricing software transforms what might normally be overwhelming amounts of data, into clear and comprehensive understanding, providing pricing teams with tools to predict and manage complex and changing demand.

Perfect Price uses AI and ML in concert with a sophisticated rules engine, to allow companies to implement the most complex pricing strategies. Our approach incorporates a combination of AI and human management - deploying changes in minutes, not days or weeks, and enabling prices to be tested before they launch.

By leveraging advanced AI, Perfect Price delivers accurate forecasts–that can continuously update to take into account new events as you re-optimize with just one click. Using both your proprietary data and Perfect Price’s comprehensive market, event and other outside data, you can make every decision perfectly.

This unique approach is how Perfect Price empowers you to execute on your own strategy, not ours. We never force you to use prices you don’t totally agree with, so you’re always in total control. Markets change and strategy needs to keep pace.

A huge advantage over legacy solutions is that using Perfect Price doesn't require a team of hundreds of pricing analysts to be able to manage complex pricing strategies. This makes Dynamic Pricing possible like never before in industries like Vacation Rental, where small teams are managing hundreds or even thousands of properties. Vacation Rental is experiencing incredibly fast growth of distribution, through platforms like Airbnb and VRBO and have a chance to leapfrog their old-school Hotel industry peers, skipping the traditional route, and moving straight to a next-gen Dynamic Pricing system.

The world is dynamic–and your customers expect you to be dynamic too. Fast decisions, accurate pricing, and no mistakes. What are you doing to keep pace with your market’s changing demand?

Interested in seeing what Dynamic Pricing can do for your business? Get started by  requesting a trial today!

 

 

 

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