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How to Drive Outstanding Customer Experience With Dynamic Pricing

In a modern competitive market, the key to success is delivering satisfaction to customers. This can be done via a combination of high-quality products or services and an adequate pricing strategy. But finding the right pricing model is a tough task. Today’s audience demands a personalized approach not only to customer service but also pricing, and that’s where a dynamic model comes in handy.

In this article, we’ll explain what a dynamic pricing strategy is and outline its benefits and pitfalls. Plus, we’ll share the best practices to follow to drive outstanding customer experience by implementing this pricing model. Read on to level up your pricing game by using a dynamic strategy wisely.

What Is Dynamic Pricing?

A dynamic pricing strategy involves price fluctuations that are affected by certain market conditions. Such factors may be supply and demand, competitor pricing, seasonality, or quantity of the product purchased.

The dynamic pricing model is traditionally used by businesses offering services, especially those with a limited quantity or limited time of active offer. These include airlines, hospitality, tourism, ticket sales, taxis, the entertainment industry, and so on. However, such a pricing strategy has recently been implemented by more and more companies selling products, mainly in the e-commerce industry.

Why Is Dynamic Pricing Beneficial?

The reasons why the dynamic pricing model is gaining popularity are numerous. Firstly, such a model keeps you competitive. As the price isn’t fixed, you can keep track of competitor pricing and adjust your prices accordingly. No matter how great your product or service is, if the neighboring store or restaurant offers a similar thing for a better price, customers will most likely prefer them. Thus, you should either have an exclusive offer that can’t be found anywhere else or take market competition into account.

A good example is happy hours in bars. It’s hard to attract tourists wandering the streets of a city center crowded with bars using your design only. However, if you implement happy hours, they will be more likely to choose you instead of your competitors.

Secondly, a dynamic model helps to avoid drop-offs in sales during demand falls. Let’s assume you own a hotel business with 30 rooms in total and sell rooms for $100 per night, regardless of the demand. This way, you may get $3,000 per day in the tourist season and only $1,000 when the demand is lower. Another way is to charge more when the demand is high and less when the demand falls to attract more customers. Therefore, you can maximize the revenue by taking advantage of the irregular demand.

Thirdly, dynamic pricing can boost your sales. Let’s imagine you own an e-commerce site selling food supplements. Most people are unlikely to order three packs of the same supplement without an external stimulus. However, if every additional pack costs less, some customers will consider this a good deal and add more packs to their cart. This way, you can sell more by creating a more attractive offer. As you can see, bulk pricing offers are also a type of dynamic pricing model.

Lastly, a dynamic pricing model provides you with insights into your target audience’s behavior and preferences. With more diverse data on demand depending on the price, you can calculate an accurate demand elasticity index. Plus, you can track which offers are successful and which aren’t. For example, your customers may be happy to purchase in bulk but not willing to pay extra for express delivery.

Types of Dynamic Pricing

Now that you know the definition of dynamic pricing, let’s take a look at the most common dynamic pricing strategies. This will help you to get the gist of how it can be implemented in your business.

  • Segmented dynamic pricing divides customers into segments to offer them different prices. The factors for segmenting may be various, but typically, it’s based on customer loyalty or the size of the purchase. For instance, customers who have been purchasing from you for years, or, alternatively, new customers, may get attractive discounts.
  • Time-based dynamic pricing. Such a strategy is commonly used by various services. In this model, businesses can charge more if a customer requests faster service completion. Another way is to adjust pricing depending on how much time is left until the offer expires. That’s applicable to ticket sales, the public transport industry, and hotels. If their offer expires on a specific date, airlines may charge more to get higher profits from people who need to travel on a specific date and don’t have another choice. Other businesses may opt to sell the remaining places at a very low price to get the most out of possible sales.
  • Peak pricing is when businesses charge more during high-demand periods.
  • Penetration pricing. In this strategy, businesses lower their pricing to attract new audiences and effectively beat the competition. Once the market share is acquired, businesses typically raise their prices to an average industry level.

What to Be Aware of With Dynamic Pricing Strategy

Although dynamic pricing may be beneficial for many businesses, it only works when it’s implemented wisely. Some common mistakes can have a crucial impact on your sales. Here are the things to keep in mind and the things to avoid when choosing a dynamic pricing model.

  • It increases market competition and may lead to a real price war. That’s especially applicable to a penetration pricing strategy or to a competitive dynamic model. When one business lowers its pricing to attract customers from competitors, they may do the same. Sometimes, it leads to a never-ending cycle of lowering prices where no one is satisfied – except the customers.
  • Some customers can’t stand dynamic pricing. Many prefer certainty regarding the price they will pay for a service. Although dynamic pricing can save them some money, it may also lead to overpaying because of factors the customer can’t control. Plus, people generally don’t like finding out that someone has paid less for the same thing.
  • It may lead to a loss of sales. Let’s assume you raise prices during demand peaks. But if you raise them too high, customers may choose competitors even if it means a longer wait or lower quality. You would likely gain more revenue by keeping prices lower and serving more customers. Another common issue occurs with segmented pricing in e-commerce. Some businesses don’t display prices straight away and ask people to sign up, call, or perform another lengthy action to view them. They do so to calculate the price depending on customer loyalty or the quantity of ordered items. However, most people won’t spend time on this, they will leave without ever knowing you had a great offer.
  • You need to invest more time, money, and effort into dynamic strategy. You’ll need a team of experts who constantly monitor the changes in market conditions or come up with marketing ideas or dedicated software. But beforehand, you’ll need to spend time thinking about your pricing model and rules thoroughly and evaluating the risks. Lastly, dynamic pricing often complicates customer complaint resolution.

Best Practices of Dynamic Pricing Strategy

Finally, let’s take a look at how to drive the best customer experience using a dynamic pricing model.

1. Base Your Strategy on Consumer Expectations

Great customer experience is driven by meeting customer expectations. Pricing on its own doesn’t matter, what does is the product or service value. For instance, customers expect prices on three-star hotels to be affordable and five-star hotels to be high. If you raise the price of a room in a three-star hotel to a five-star level, you won’t meet customer expectations. Another example is comparably large investments, such as furniture or TVs. Many people research offerings for months before they make a purchase. If you suddenly raise the price when a customer is ready to buy, you will lose the sale.

Base Your Strategy on Consumer Expectations

Carefully research the market offerings and customer expectations before implementing dynamic pricing. Even if you’ve purchased advanced pricing calculation software, you should also review and approve the changes manually.

2. Test, Analyze, Adapt

Testing is crucial to get your dynamic pricing strategy right. Analyzing software will help to keep track of sales changes depending on the pricing. You can start by implementing a dynamic model to one product or category only before moving to this strategy completely. Taking small steps ensures you can measure the impact in detail and make adjustments quickly.

3. Don’t Raise Prices High Just Because You Can

While dynamic pricing can help to boost revenues, you shouldn’t become greedy and inconsiderate to customers. This only leads to a loss of sales and customer loyalty. A perfect example is manufacturers of face masks and cleaning products who have raised their prices sky-high during the pandemic. This is generally seen as taking advantage of the situation, and customers tend to remember such sharp practices.

4. Be Transparent

Transparency is crucial with the dynamic model, as it drives the perception of fairness in pricing. People want to know why they are paying more or less, and how the price is calculated. If you indicate that the price of a service is higher than usual due to increased demand, customers take it as a logical decision. However, if you raise the price without warning and explanation, most consumers will assess it as pure greediness.

Transparency is also important in personalized pricing. If your e-store calculates the delivery price based on the area of residence and shipping times, make sure the calculations are available to the customer. The same goes for professional services, for instance, design. When issuing a personalized quote for website design, describe exactly how much you charge for a specific action and how much time it takes. Telling a customer a website costs $5,000 is straightforward but risky. A person unfamiliar with your working process may assume you’ve overstated the time spent on it or material cost.

5. Ensure Pricing Consistency Across Channels

Omnichannel marketing has become a business essential recently. But some businesses fail to align the pricing across online and offline channels.

Let’s imagine you’re on a car trip and haven’t booked a hotel in advance as you weren’t sure where you would stop. You browse the internet and see a hotel room for $100 per night. As you’re close to this exact hotel, you decide to make a walk-in reservation. The front desk worker says the same room costs $120 per night. You likely won’t be happy about it. Even if the hotel decides to sell the room for $100, it’s a potential conflict situation.

The same goes for retail. If you own a physical and online store, you must ensure the same offers are available in both. There may be exceptions, though. Some retailers mark their e-store discounts as “special online offer” to avoid customer dissatisfaction. The only issue in this case is that such an offer may decrease your offline sales during the online promotion.

6. Focus on Out-the-Door Pricing

An item price isn’t always equal to the total price. Customers consider the added taxes, shipping costs, service charges, and other factors that affect the out-the-door price. When implementing dynamic pricing, you should take into account not only the value of your product but also of add-ons. If you offer extremely expensive shipping, product price lowering won’t help to attract customers. That’s why “free shipping” and “tax included” signs work so well at driving sales. Don’t neglect dynamic pricing on shipping and add-on products often bought with the main purchase.

Play Safe, Get Outstanding Results

A dynamic pricing model can boost your revenues and customer satisfaction when utilized correctly, though it isn’t the easiest strategy to implement. Due to the importance of analytics and testing, hiring a professional is the best way to ensure your dynamic pricing works as intended. Our team’s mission is to coordinate with your team members to collect feedback, analyze it, and improve your strategy to drive outstanding customer experience together.

By interactivated • on August 3, 2021

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