Dynamic pricing is when a seller changes its price to match the market and capture more customer demand. Prices fluctuate based on the underlying supply and demand, and that seller's understanding of how its customers will react to those changes.
In cases of expiring inventory or finite supply, such as airline seats or seat upgrades, dynamic prices are driven by customer behavior and the expected availability of supply to meet demand. This is common in travel and transportation markets.
If prices move only because competitors moved their price, not based on underlying demand changes or the expiration of inventory, this is price matching and is common in price transparent markets like retail.
Dynamic pricing is a powerful growth and profitability tool. For retailers, being priced outside of the market can lead to bankruptcy. Toys-R-Us famously refused to price match Target and Amazon, costing it loyalty. For companies selling expiring goods, failing to dynamically price can be even worse. Harvard Business Review provides these questions to determine if dynamic pricing is right for you:
Is your capacity relatively fixed?
Is your demand predictable?
Is your inventory perishable?
Are your fixed or sunk costs significant
compared to your variable costs?
Does demand vary by time?
If you answered 'yes' to at least four of these questions, dynamic pricing is critical for your business. If you answered 'no' to two or more of the questions, dynamic pricing may still be the right choice for your business depending on your market. An analysis by Perfect Price can simulate a dynamic pricing strategy and backtest that against your actual results to prove or disprove a business case.