Dynamic pricing is a hot business topic. According to the Harvard Business Review, some inflation-fatigued customers perceive it as a corporate profit-boosting scheme. Yet, when implemented well, it can be an efficient means for companies and customers to share value.
If you’re interested in using dynamic pricing to benefit your digital platform company and its customers, here’s an overview of what it entails and why it’s important.
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Dynamic pricing is a strategy that bases products or services’ prices on evolving market trends, such as:
- Supply and demand
- Competitor pricing
- Inventory levels
Digital platforms use data analytics and technologies like artificial intelligence and machine learning to deploy sophisticated algorithms that analyze market conditions and predict optimal pricing.
If you want to enable your digital platform business to stay competitive, here’s how dynamic pricing can benefit your strategy.
Why Is Dynamic Pricing Important?
Enhances Market Adaptability
Dynamic pricing enables digital platforms to rapidly adapt to changing market conditions.
For example, Amazon Marketplace uses it to compete in the e-commerce industry, where 35 percent of all retail sales are expected to occur by 2027. Using real-time data, Amazon not only matches or beats competitors’ prices but tailors its own to customers’ preferences, browsing histories, and purchase behaviors.
That kind of adaptability is crucial if you want to serve your target audience and help your business thrive in competitive, shifting markets.
Balances Supply and Demand
Since most digital platforms operate in ever-changing industries, balancing supply and demand can be challenging. Dynamic pricing addresses that issue by adjusting prices in response to market fluctuations.
In the online course Winning with Digital Platforms—taught by Harvard Business School Professor Feng Zhu—ride-sharing company Fasten serves as one real-world example of why dynamic pricing is essential to balancing supply and demand.
“If you don't have dynamic pricing, you can't essentially satisfy demand,” says Vlad Christoff, Fasten’s co-founder, in the course. “What dynamic pricing is supposed to do is say, ‘OK, these are the high-traffic areas; these are the high-demand areas.’ And there’s technology that can actually predict this.”
Christoff explains that dynamic pricing helps Fasten limit unnecessary demand.
“Some people say, ‘Well, I was going to pay $10, but I'm definitely not paying $20, $30, $40. I'll just walk; I don't need to get in a car,’” Christoff says. “At that point, only the people who really need the ride and are willing to pay are essentially getting rides.”
With dynamic pricing, you can meet customer needs while managing resources efficiently—ensuring you satisfy those who value your services the most.
Maximizes Profitability
Dynamic pricing can also increase your digital platform’s profitability. By adjusting prices in real time based on market demand, your business can maximize its revenue potential. However, companies lacking transparent pricing models have faced backlash for “hidden” surge pricing.
In Winning with Digital Platforms, Christoff shares a more transparent approach Fasten implemented called Boost.
“Boost was essentially our version of dynamic pricing of Uber's surge and Lyft's Prime Time,” Christoff says. “Initially, you make a request at the nominal rates. And if no driver was willing to take it, you gave it a boost. You said, ‘OK, I'll pay 1.5x, so I'll pay 2x.’ And the driver would get another round. Essentially, that request would go to the same group of drivers, and say, ‘OK, maybe it's the same rider, maybe it's a different rider. But now this pays 50% more, 100% more. Now, are you willing to take this request?’”
To be transparent, many companies have shifted to upfront dynamic pricing.
For example, hotels use upfront dynamic pricing to enhance consumer confidence in online bookings. By showing how demand, timing, and events affect room rates, customers are more inclined to follow through with bookings, helping reduce cancellations from unexpected costs.
By using upfront dynamic pricing, you, too, can reduce the likelihood of deterring customers from prices that maximize profits.
Boosts Sales
Dynamic pricing is also effective for boosting sales with fluctuating demand.
For example, airline travel is a dynamic market. Due to seasonal travel patterns, economic conditions, and changing consumer preferences, airlines can over- or under-book flights.
To address volatility, digital platforms like Expedia employ dynamic pricing to fill seats by collecting real-time airline data. Using algorithms, Expedia calculates prices that factor in market demand, competitors’ pricing, and time remaining before departure.
In this way, dynamic pricing creates a win-win situation by maximizing airlines’ seat occupancy and offering travelers competitive fares that fit their budgets and schedules.
How to Create a Dynamic Pricing Strategy
Designing your digital platform’s dynamic pricing strategy can be complex but worth the effort. Whatever your approach, make it a point to remain flexible.
“A platform firm doesn’t have to choose one method and stick with it forever,” Zhu says in Winning with Digital Platforms. “In fact, given that markets themselves aren’t static entities, it can be wise for platforms to periodically revisit their choices.”
If you’re examining how to create and capture value with your company’s pricing model, consider enrolling in an online course, like Winning with Digital Platforms. Through engaging with real-world cases and business leaders’ insights, you can understand dynamic pricing’s nuances and how to respond to opportunities in your industry.
Do you want to learn more about dynamic pricing and how to launch, scale, maintain, or work with a successful platform business? Jumpstart your educational journey by exploring Winning with Digital Platforms and downloading our free entrepreneurship e-book.
