In the hyper-competitive online retail industry companies can't afford to have stagnant prices. To gain an advantage, companies have to respond immediately to conditions in the market and adjust their prices accordingly. Dynamic pricing is a must in order to stay competitive in the 21st century.
Unlike a fixed or manually managed pricing strategy, dynamic pricing updates prices in response to real-time customer demand, changing behavioural patterns, customer pricing campaigns, and other external factors such as the time of day, seasonality, or weather.
The goal of dynamic pricing is to achieve the optimal price at any given point in time. By automated data driven decision making, real time processing, and immediate reactions to the market situation dynamic pricing can increase sales and maximize company profits.
Dynamic pricing is based on the following concepts:
- Product segmentation - Products are grouped based on customers' buying behavior
- Customer segmentation - Customers are grouped based on behavioural patterns and activity history
- Demand modelling - Predictions of future sales and price elasticity are made for each product segment
- Optimization - The profit maximizing price is calculated based on the information about the particular customer and product segments
4.5M EUR annual increase in company revenue Airline industry, 2015