Promotional Pricing: Dynamic Pricing

The concept of dynamic pricing has received a great deal of attention in recent years due to its prevalent use by airlines, hotels, and ridesharing services. But the basic idea of dynamic pricing has been around since the dawn of commerce. Essentially, dynamic pricing allows for point-of-sale (i.e., at the time and place of purchase) price adjustments to take place for customers meeting certain criteria established by the seller. The most common and oldest form of dynamic pricing is haggling, the give-and-take that takes place between buyer and seller as they settle on a price. While the word haggling may conjure up visions of transactions taking place among vendors and customers in a street market, the concept is widely used in business-to-business markets as well, where it carries the more reserved label of negotiated pricing.

However, technological advances offer a new dimension for the use of dynamic pricing. Unlike haggling, where the seller makes price adjustments based on a person-to-person discussion with a buyer, dynamic pricing uses sophisticated price optimization software to adjust price. It achieves this by combining customer data (e.g., who they are, how they buy, when they buy) with pre-programmed price offerings. If a customer meets certain criteria then special pricing may be offered.

As noted, dynamic pricing is also widely used in the service sector. For instance, airline ticket pricing will vary based on such criteria as type of customer (e.g., business vs. leisure traveler) and date of purchase. Additionally, in some industries, dynamic pricing is used to respond to changes in demand. Known as surge pricing, pricing software may increase prices from a regular level to a higher level as demand increases. For example, surge pricing is used by ridesharing services (e.g, Uber, Lyft) to adjust prices higher during times of peak demand.