INTRODUCTION

Dynamic pricing is one of the most fundamental and commonly used revenue management tools. It enables rms to increase revenue by better matching supply with demand, responding to shifting demand patterns, and achieving customer segmentation. Since its early success in the airline industry, dynamic pricing has now gained popularity in many other industries where revenue management plays a central role, including the hotel industry, the car rental industry, the cruise line industry, the entertainment industry, and the retail industry.

Most dynamic pricing problems in revenue management share the following three main characteristics.

First, there is a given and finite selling season (or time horizon). Products in revenue management applications are typically time-sensitive with a fixed selling season. For example, most airlines start to sell seats several months before the departure time, and most fashion apparel has a selling season that may only last for six to eight weeks.

Second, there is a given and finite amount of inventory of a product available at the beginning of the selling season to be sold over time, and no inventory replenishment is possible during the selling season. For example, airlines typically commit a particular type of aircraft to a particular fight, and hence the number of seats on each fight is fixed and no new seats can be added to a given fight. Similarly, due to a long supply lead time, retailers often make a one-time order long before the beginning of the selling season, and once the selling season starts, there is no opportunity to replenish the inventory if the demand turns out to be higher than expected.

Third, pricing is dynamic in nature and the selling season consists of multiple periods such that a different price may be set for a different period rather than having a single price for the entire season (which is called fixed or static pricing). It is possible that in some extreme cases, the optimal price in each period happens to be identical and hence a fixed pricing policy is optimal.

What is Dynamic Pricing?

Dynamic pricing, also called real-time pricing, is an approach to setting the cost for a product or service that is highly flexible. The goal of dynamic pricing is to allow a company that sells goods or services over the Internet to adjust prices on the fly in response to market demands. 

Changes are controlled by pricing bots, which are software agents that gather data and use algorithms to adjust pricing according to business rules. Typically, the business rules take into account such things as the customer's location, the time of day, the day of the week, the level of demand and competitors' pricing.  With the advent of big data and big data analytics, however, business rules for price adjustments can be made more granular. By collecting and analyzing data about a particular customer, a vendor can more accurately predict what price the customer is willing to pay and adjust prices accordingly.

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Dynamic pricing is legal, and the general public has learned to accept dynamic pricing when purchasing airline tickets or reserving hotel rooms online.  The approach, which is sometimes marketed as a personalization service, has been less successful with online retail vendors. Dynamic pricing can be contrasted with fixed pricing, an approach to setting the selling price for a product or service that does not fluctuate.

Dynamic pricing issues

1. Customer perception

Many consumers aren't aware of the fact that retailers alter prices on a regular basis, and did so

even before the advent of online retail, but as it becomes more noticeable thanks to the web,

retailers must consider the perception issues it raises.

Put simply, a customer who observes that a product can become cheaper or more expensive

within minutes may not be thrilled at the prospect that they could end up paying more for a

product based on little more than, say, the time of day.

Particularly worrisome is the possibility that some users will notice dynamic pricing, but won't

quite understand what's going on, resulting in a reduction of trust.

2. Data accuracy

Dynamic pricing depends on data, and when pricing is being changed on the order of hours or

even minutes, ensuring that the data driving pricing decisions is accurate is critical. While there's

a growing ecosystem of data providers and the techniques by which data is collected and filtered

are sure to improve, retailers shouldn't assume that bad data won't make it into their systems.

3. Algorithm mishaps

Wall Street and the phenomenon of flash crashes reminds us that algorithms are far from perfect

and can produce costly errors. As retailers embrace dynamic pricing models which are of course

based on algorithms, thought should be given to how mishaps can be minimized and what

policies will govern when a mishap results in a big mistake (eg. customers being able to purchase

a product at a ridiculously low price).

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4. Altered customer behavior

As the existence of dynamic pricing becomes more evident to consumers, retailers will need to

grapple with the possibility that it could impact customer behavior.

On one hand, dynamic pricing clearly has the potential to encourage sales, but is it possible that

in some instances it could it impede sales? If customers come to believe that the price of a

product might go down in the very near future, and perhaps even on the same day, it's not

unfathomable that some of them would decide to hold off on a purchase.

And as every retailer knows, a delayed purchase is much more likely to become a purchase that

never happens, or happens somewhere else.

5. Overall experience

While price is an important factor in purchasing decisions and is often the most important factor,

retailers should remember that their long-term success will likely depend on their ability to offer

much more than that.

Customer service, selection, shipping, return policies and loyalty schemes can also help drive

sales, even when a retailer can't offer the lowest price. These things are often crucial to fostering

the brand positioning and customer loyalty retailers covet, so embracing dynamic pricing without

addressing overall customer experience is short-sighted.

Dynamic pricing using by the companies

Amazon changes its price every 10 min on an average

The most notable proponent of dynamic pricing is the airline industry – the sheer range of

variation of ticket price can surprise even those who are in knowledge of this widespread

practice. The airlines have been able to maximize their profits using this. The e-

commerce industry statistics point out that Amazon changes its price every 10 mins on average1.

They have been intelligently using dynamic pricing for more than a decade to undertake

empowered business decisions. Offline retailers like Walmart have also followed suit in recent

years.

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Not leveraging pricing as a factor to drive sales? You are missing out on a big chunk of

your revenues.

With technology as its backbone, the e-commerce retailers have the complete information from

the pages browsed to the time spent on each page to the past purchase data. Moreover, you

cannot simply change the price tag once a customer steps into the store, but in an-online

counterpart you can change the prices for every customer who logs in using a plethora of

information including browsing history.

Just think of a case where you browse through a product category for a long time and yet does

not carry out a purchase transaction. In such a scenario, the e-commerce retailer has the data

available and can roll out an immediate 24-hour expiry coupon for the purchase within that

product category. This not only sounds interesting from a user point of view, but also makes

business sense for the retailers.

If a number of e-retailers offer a standardized product, then in that case, price becomes the

differentiating factor. Consider the following example for Samsung Galaxy S5:

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Opportunities associated to dynamic pricing

The top three reasons why dynamic pricing is more than just a trend in retail: 

1. It Contributes To A Strong Business Strategy

Traffic, conversion rates and demand all vary based on the time of day, season and more. Dynamic pricing is a way to test the price elasticity of demand and has the potential to make a huge impact on revenue and profit. For example: If a retailer is selling a toy that’s been labeled the hot item of the season, they can probably bump up the price and enjoy profit they would have otherwise missed out on. The opposite is also true. If you’re carrying a toy that’s no longer a top seller, you can lower the price to increase sales and move inventory. 

2. It Has Proven Useful In Many Industries

Dynamic pricing makes sense in many areas, such as the sports industry. Many teams have started to use dynamic pricing while selling tickets. By increasing ticket prices before a big game, many teams have boosted revenue. Amazon is one of the retail giants leading the push for dynamic pricing. While Amazon might make it seem like dynamic pricing is just about lowering prices to be hyper-competitive, price increases are just as important. Take the airline industry. Some days are popular for traveling, while others are slower. By dropping prices on the slower days, airlines are able to fill flights and make the most out of their existing routes. 

3. It Is Used By Retail Leaders

Dynamic pricing provides plenty of benefits for retailers. Amazon and Walmart are two well-known retailers that use dynamic pricing constantly. Amazon changes prices as frequently as every 10 to 15 minutes on many of its products, and its sales rose by 27.2% in 2013. 

Walmart changes prices about 50,000 times per month and its online sales eclipsed Amazon’s, with a 30% increase in 2013. Retailers like Amazon and Walmart use dynamic pricing because it allows them to stay up-to-date on competitor pricing, pricing trends and avoid getting left behind the competition. However, dynamic pricing can be difficult to manage. Because of this, many retailers have turned to technology to automate what was once a manual process. 

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Forrester Research estimates that price optimization software improves gross margins by 10% and can make a huge impact on sales and profit. To put any fears to rest, retailers using an in-house or third-party dynamic pricing software can set reprising rules to ensure that their pricing always matches their brand identity and never goes below cost. As an added bonus, there is no possibility of unwillingly engaging in a margin depleting price war. 

 Dynamic pricing is the future of pricing strategy for retailers. The world has experienced incredible technological advances over the past decade, and dynamic pricing is certainly one of the most monumental. It is becoming the standard in the retail industry and the future seems bright for this trendy strategy. 

Let’s look at how dynamic pricing can be an important tool for revenue maximization.

What is dynamic pricing?

It is a price-to-market technique where rates are adjusted based on the demand and supply pattern. In India we see this model already functional in the airline sector. Flight ticket prices fluctuate depending on the number of seats sold on a specific flight. That’s why ticket prices rise closer to the date of departure.

Why hotels should adopt a dynamic pricing strategy?

In the hospitality sector, dynamic pricing model had been adopted by a few global hotels such as Marriott and Hilton in the early 2000s. However, more and more hotels are now adopting this model including hotel chains such as Taj properties, ITC and Leela. It is being seen as a strategy to offer cost-based pricing during off-seasons to cover their operational costs, while hotels can charge higher room rates during peak seasons to maximise revenue.

In fact, dynamic pricing is becoming a very popular model between hotels and travel companies. Here dynamic pricing is realised as the percentage of discounts hotels offer on their best available rate to travel companies. According to a survey report by GBTA, some travel companies feel that dynamic pricing is the best cost-saving proposition particularly in cases where they don’t drive sufficient volume to qualify for a corporate discount.

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How to overcome the challenges of dynamic pricing?

While dynamic pricing is emerging as one of the major trends of revenue management, there are still several challenges that hotels face which is stopping it from being adopted on a large scale. For an efficient dynamic pricing system, the revenue manager has to be at the top of his game at all times. There are two parts of dynamic pricing – arriving at a daily time-based pricing mix and forecasting a long term price strategy.

To achieve the former, revenue managers should have access to a responsive revenue management system with integrated business process that allow them to track important metrics such as occupancy, ADR, channel performance, room availability and customer demand real-time so that pricing decisions can be made quickly. Coupled with a strong distribution system where rate updates and packages can be published real-time across all channels will not only boost yield but also provide for transparency in hotel rate strategy.

Arriving at a long term pricing strategy can be a bit more complex. Revenue managers need to be able to assess customer demands and booking patterns from the previous years and predict the same for future. An efficient long term pricing strategy, where revenue managers can show the predicted volume of business in the coming year and the forecasted room rates per room type and season, can be a great way to win trust of travel companies and encourage them into entering a dynamic pricing business model. But if such predictions turn out to be incorrect, the hotels business can really take a hit.

However, with advanced technology, revenue managers can now resort to business intelligence applications that not only record data year-on-year but can also translate them into understandable trends and patterns for revenue managers to take agile decisions. Assisted by reliable prognostic analytic applications, revenue managers can not only forecast budget and price trends till the last available inventory ahead of time but also automate the revenue process by setting their top and bottom-line objectives. This simplifies the challenging process of dynamic pricing to a great extent and also allows for the revenue managers to capitalise on changing marketing conditions real-time and stay ahead of competition.

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Dynamic pricing in real-time: Where online retail is headed

Posted on October 23, 2014August 21, 2015 by Angelica Valentine

What will be responsible for taking ecommerce as we know it to the next level? Many trends have taken e-commerce by storm lately, from omni-channel retail to social commerce, but the real answer can be found in the strategies that have made behemoths like Amazon and Best Buy so successful.

Why Dynamic Pricing Matters

Dynamic pricing is necessary in online retail because shoppers are highly price sensitive and the market is hyper-competitive. The rise of mobile has made this even truer. Shoppers now have price comparison engines at their fingertips at all times through desktop, mobile sites, and apps. Therefore, retailers need to be aware of competitor pricing changes and have the ability to react in real-time. This gives them the opportunity to be competitive and, more importantly, remain profitable no matter what’s happening in the market.

How Price Elasticity Fits In

Price elasticity, or the effect that small price changes have on the demand for a given product, is a big part of dynamic pricing. Testing price elasticity is a great way to find the optimal price when introducing a new product to the market. Dynamic pricing makes it possible to A/B test the prices of products and based on that, online retailers can figure out the price elasticity for specific products.

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BIBLIOGRAPHY

http://whatis.techtarget.com/definition/dynamic-pricing http://www. businessdictionary .com/definition/dynamic-

pricing.html http://www.csmonitor.com/Business/Saving-Money/

2013/1104/Everything-you-need-to-know-about-dynamic-pricing

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