Dynamic pricing

Dynamic pricing, or demand and surge pricing, is a quick adjustment mechanism. Generally employed by B2C businesses, it works with changing dynamics such as demand, time of day or season.

It’s a strategy in which a business adjusts its prices in real time. It is used to capitalize on a surge of demand and a willingness to pay higher prices. It can also be used to lower prices for situations such as the need to alleviate excess inventory.

How do you implement dynamic pricing?

So, how do you justify a price hike when so many people are looking for discounts?

“You've got to have a lot of good real-time data and analyses of that data,” says Ajay Sirsi, Director at the Centre for Customer Centricity at York University’s Schulich School of Business.

“Companies need to build a certain attentiveness into their systems that reacts when there's an opportunity to raise prices.”

Examples of dynamic pricing

• Airline tickets
  Prices fluctuate based on demand, booking time and seat availability.
• Ride-sharing
  Surge pricing increases fares during peak hours or high demand.
• Hotel rooms
  Prices adjust based on season, local events and occupancy rates.
• E-commerce
  Prices shift based on demand, competitor prices and shopping trends.
• Streaming services
  Subscription fees can vary based on promotions, location or time of year.
• Sports and event tickets
  Prices change based on popularity, demand and the resale market.
• Online retail
  Websites change prices based on user behaviour, demand and competitor pricing.
• Electricity providers
  Time-of-use pricing means rates increase during peak hours and drop during off-peak times.
• Gas stations
  Prices fluctuate daily based on oil prices and local competition.
• Fast food and restaurants
  Some chains test variable pricing for peak dining hours or delivery fees.
• Subscription Services
  Companies adjust pricing based on usage, feature access or business needs.

What are the risks of dynamic pricing?

Dynamic pricing can bring with it risks for businesses. Some customers may resent what they see as arbitrary price hikes, says Sirsi, who adds that dynamic pricing could also subject you to some regulatory inquiry.

“It could be viewed as price gouging in some situations,” he says. “It’s hard to know where the line is when you’ve crossed over. Some lawmakers say this is price gouging, while others say it's simply part of a free market.”

Sirsi suggests that before you set up dynamic pricing, you look at what your competitors are doing, such as how much inventory they carry. He also says talking to your customers and asking them questions will help you take the temperature of the marketplace.

“You have to understand how far that elastic can stretch because, at one point, your customers will say, ‘That's just too expensive.’ You have to see how much of a need there is for this product and how far they're willing to pay.”

Next step

Download Build a More Profitable Business. The free BDC guide helps you analyze your business financial information to set a competitive price for your goods or services.