Dynamic Pricing Examples from the Digital Age: From Airlines to Online Retailers

Dynamic Pricing Examples from the Digital Age: From Airlines to Online Retailers

Dorota Owczarek - April 14, 2023

Do you ever wonder how companies set their prices? It turns out that many businesses are turning to dynamic pricing to stay competitive in today’s fast-paced marketplace. Dynamic pricing is a pricing strategy that involves adjusting prices in real-time based on a variety of factors, including supply and demand, inventory levels, market conditions, and customer behavior. This allows businesses to optimize their revenue, boost profits, and stay ahead of the competition.

In this article, we’ll take a deep dive into dynamic pricing examples from various industries, including airlines, online retailers, entertainment, and hospitality. We’ll explore real-life case studies of companies that have successfully implemented dynamic pricing strategies and discuss the advantages of this pricing approach. Whether you’re a business owner looking to increase revenue or simply interested in learning more about dynamic pricing, this article is for you.

So get ready to explore the fascinating world of dynamic pricing and discover how companies across industries are using this innovative pricing strategy to achieve success.

TL;DR

• Dynamic pricing is a pricing strategy that involves adjusting prices in real-time based on factors such as supply and demand, inventory levels, and customer behavior. It is a powerful tool for businesses looking to increase revenue and stay competitive in today’s marketplace.

• Many industries, including airlines, eCommerce stores, logistics, transportation, entertainment, and hospitality, have successfully implemented dynamic pricing methods to optimize revenue and stay competitive in the marketplace.

• Online retailers such as Amazon and Walmart have used dynamic pricing to adjust prices based on competitor prices and inventory levels. Many other eCommerce shops are implementing dynamic pricing based on different strategies.

• Marriott International and Airbnb are examples of companies in the hospitality industry that have implemented dynamic pricing to fill rooms and adjust prices based on demand. Airbnb offers its pricing engine to support hosts on its platform.

• All major airlines use dynamic pricing systems to set ticket prices. Similarly, rail and bus companies price their services. Another common example from the transportation sector is ridesharing services, like Uber or Lyft.

• Cargo transportation is another sector that benefits from dynamic pricing solutions. Previously manually priced transportation services in shipping, rail, LTL, and FTL are priced in an automated fashion with the help of dynamic freight pricing engines (Maersk Spot, Convoy, or Loadsmart).

• If you’re looking for support in implementing a dynamic pricing model for your business, nexocode AI Experts are here to support you. Contact us to discuss your pricing strategy.

Dynamic Pricing Strategy: Definition and Types

Speaking briefly, dynamic pricing is a strategy that uses flexible prices as opposed to fixed ones, aiming at different prices to maximize one’s profit. These flexible prices can be estimated in various ways, depending on the main goals of your strategy, your target group, and its approach toward dynamic pricing (which, although increasingly common, may still raise some controversies.

Dynamic pricing strategies - how they work?

Dynamic pricing strategies - how they work?

A Quick Recap on Dynamic Pricing Strategy

Some types of dynamic pricing are quite complex when it comes to calculation, while others rely on simple equations. You can either pick one specific type and build your pricing model accordingly or mix a few different ones in order to make your estimations even more accurate. 

Commonly, companies run A/B tests with different strategies to find the most beneficial one. There is no universal recipe here - you cannot be entirely sure whether a particular strategy will work for you unless you try it in practice. However, by carrying out complex analysis - which, by the way, we can help you with - you can identify the most relevant variables for your particular case. 

Dynamic pricing implementation is a complex process that involves market research and analytics, so it’s better to have specialists’ backs. Here we break it down into various steps. Meanwhile - let’s try to understand what dynamic pricing scenarios are there to adopt.

Types of Dynamic Pricing

Picking your strategy’s type is one of the first steps on your path toward the implementation of dynamic pricing. Let us introduce you to the most popular ones so that you can understand better which one could be your best fit.

Value-Based Pricing (Price Elasticity)

This strategy is based on a simple principle - you try to estimate the value your offer brings for a particular customer and calculate your price based on that. A person that has already been looking for your product or service, knows the brand, or experiences some sort of urgency will be likely eager to pay more than the one who has just stumbled across it and has never shown much interest in it before (you can verify it with a tracking data). Effective value-based pricing requires an efficient data flow and analytics, as well as thoughtful segmentation.

Price Skimming

This strategy can particularly benefit products that introduce innovative products or services to the market. In a nutshell, it sets the price high and gradually lowers it as the competition enters the market.

Peak Pricing

This strategy strongly relies on demand, increasing the price when it reaches its peak. In a certain way, you could also call it value-based, since during demand surges, the value of the product or service naturally increases. Peak pricing allows companies to make the most of a time opportunity while also regulating the availability (some customers will choose to purchase when the peak ends).

Competitor-Based Pricing Strategy

In its case, as the name suggests, competitors’ prices are the most significant variable. The key is to pick relevant benchmarks. You can choose different paths depending on your goal, either aligning your prices with an average market price or identifying the competitors you aspire to in financial/image goals, or identifying with and adjusting your price list to them. Alternatively, you may try to beat the competition by setting the lowest price.

Segmented Pricing - Dynamic Pricing Based on Groups

This strategy is essential for businesses that sell to different targets or try to attract those. Instead of relying on universal variables such as demand, segmented pricing finds relevant price points for each user based on the target group they fall under. Each group has different rules predefined based on their customs and preferences. 

For this strategy to be successful, you need to be capable of tracking, collecting, and processing advanced user data from different sources. Otherwise, it will be impossible to place your user in the right segment and, thus, find the price that maximizes the chances of purchase.

Time-Based Pricing

Another strategy on the list that takes advantage of the time opportunity. Here, instead of relying on surge pricing only, you try to estimate the most optimized price at this specific moment, also considering the user traffic, the inventory, the availability, etc. 

Inventory-Based Pricing Strategy

In the case of inventory pricing, price tags reflect stocks. E-commerce companies often use it to dynamize sales during low-sales periods and control them during peaks. Just like peak pricing, this strategy plays a significant regulatory role, adjusting the prices to optimize inventory management. It means that based on the real-time stock levels and historical inventory data, the algorithm will manipulate the prices to enable the most efficient usage of the warehouse space, creating savings while maximizing profit.

Penetration Pricing

An opposite strategy to a previously mentioned price skimming, penetration pricing implies picking a minimum price for the market launch and slowly raising it as the clientele grows stronger and the brand gets more recognition. Analogically, while price skimming works perfectly for innovative products, penetration pricing works much better in more saturated industries.

Dynamic Pricing in eCommerce and Retail

E-commerce has adopted dynamic pricing quite fast, since the biggest marketplaces have made it a significant part of their sales strategy. Customers, at the beginning skeptical about this approach, now struggle to imagine static pricing on the most popular platforms, having noticed how many cost-cutting opportunities flexible prices bring. 

E-commerce and retail businesses often use time-based pricing (Media Markt can be an example of a company that maximized their profit this way), mixing it with peak and inventory pricing to regulate the stocks and optimize the management of their resources.

Amazon is often cited as an example of a successful dynamic pricing implementation, having set an industry standard of price change frequency (they change product prices multiple times per day). At the present moment, every major marketplace relies on dynamic pricing, enabling retailers to set up their prices in a preferred way.

Dynamic Pricing in Airline Industry

Airlines have been using dynamic pricing for quite a long already. Most of them, from Lufthansa to Ryanair, have implemented it to a certain extent on their own platforms. The dynamic pricing boom came with the popularization of budget flights, making hunting for ticket bargains a popular sport. Users were trying to break down the algorithms, which, to this day, remain quite simple, relying mainly on demand, availability, seasonal peaks, and external factors such as fuel price fluctuations. 

Reinforcement learning model is commonly used to implement dynamic pricing strategy in airlines

Reinforcement learning model is commonly used to implement dynamic pricing strategy in airlines

However, in recent years, airlines and flight search engines have been putting more emphasis on context pricing, investing in segmentation to maximize their profits. Separating the leisure from business users, they can create two different scenarios, taking into consideration that the second group is much more likely to book last minute.

Now that the era of cheap flights is slowly coming to an end, loyalty status will likely gain importance as a variable. Behavioral data could also help companies motivate customers, accustomed to bargaining opportunities.

Dynamic Pricing in Hospitality Sector

Just like in the case of airlines, the hospitality industry strongly relies on seasonality and availability, both when it comes to traditional and dynamic pricing strategies. The dynamic one can take these standard factors and extend them with personalization in order to maximize margins. 

In hospitality, the segmentation to business and leisure makes as much sense as in the airline industry since business travelers (who often book last minute) are much more likely to accept higher price points. Many booking platforms encourage users to segment themselves by defining their search (ex. “are you traveling for business or leisure” tick box), so there is no need to even use the tracing data.

The hospitality industry was one of the first to broadly adopt dynamic pricing, which was mainly the influence of big booking platforms such as Booking.com or Airbnb. Their users grew accustomed to the price changes, setting a new standard. Aside from maximizing profit, the businesses that relied on these platforms could automate their price updates, which lowered the possibility of error and excluded a lot of manual work. So, it’s a win-win! Other than relying on the built-in features, business owners can integrate their dynamic pricing tool into the platforms and customize their strategy.

Dynamic Pricing in Entertainment

Entertainment is another sector impacted by seasonality by default, which makes dynamic pricing a perfect solution in its case. When it comes to events, most organizers combine supply and demand with time variables to calculate the accurate price. In most cases, the increase is gradual, with early-bird tickets being the cheapest. The closer it is to the event, the higher the price will usually get. 

However, the companies can make such a simple algorithm more elaborate, so that it adjusts its estimation to the current interest (if the tickets do not sell out, it is worth trying different values to check their impact on sales). Customer data (location, preferences) can be helpful with fuelling sales, too, if you implement value-based pricing. Once you identify the fans, you can target them directly and raise the price without lowering the probability of purchase. 

Demand pricing is becoming increasingly popular in entertainment. However, it is still far from being widely accepted. For instance, a popular ticket vendor, Ticketmaster, has been criticized for using this strategy which made the ticket prices for Harry Styles’ concerts skyrocket. Due to the specifics of the industry, the surges in price affect the wallet much more than in, for instance, e-commerce, so naturally, such pricing method causes some backlash.

Dynamic Pricing in Ridesharing Platforms

Ridesharing platforms played a significant role in popularizing dynamic pricing for a broader audience. Flexible prices are inherent to this niche since its beginning, so the companies did not have to test user boundaries as much as the other industries. 

Uber, the first big player in the ridesharing market, made dynamic pricing is its main advantage (next to transparency). Now the customers could know how much they will pay for the ride straight ahead and control their expenses by waiting through the demand peaks or finding another pickup point. Uber’s algorithm relies on a time-based opportunity, calculating a relevant price based on the demand and the current availability of drivers in the area. 

The following applications that shared a similar business model with Uber had to stand out somehow. Some, like Bolt, resorted to pricing. In some markets, the company used the penetration pricing method, attracting users of other ridesharing platforms with low prices and gradually raising them once they gathered a loyal clientele.

Dynamic Pricing in Logistics

With the fluctuating fuel prices, new regulations enforcing greener transport politics, and drastic changes in demand, logistics need flexible solutions, and dynamic pricing works perfectly for it. In recent years, flexible prices in spot market have become increasingly common as an alternative to fixed contracts, making it easier for logistics companies to avoid losses and maximize their margins instead of sticking to unfavorable deals. 

Businesses from the logisitcs and transportation sector can use dynamic pricing in order to automatize the bidding process and dynamize the last-minute purchases by spots, avoiding empty miles to stay green and compliant with the new norms. Such a strategy can also help them regulate availability in the time of sales peaks. 

Dynamic Pricing in Utilities

Throughout the year, the cost of supplying utilities varies due to changing weather conditions, demand, and the cost of resources (that particularly applies to electricity). The demand peaks - like late afternoons, particularly in extreme weather conditions when the heating or air conditioning is used extensively - force the electricity providers to activate the so-called “peaker plants.” That means additional costs, which they want to compensate with thoughtful dynamic pricing. 

Considering the nature of the offer, which is universal and essential, using any form of personalized pricing method would, of course, be counterproductive and even unethical. However, time-based dynamic pricing is becoming increasingly common among utility providers. For now, they tend to define the more expensive periods throughout the day, but real-time pricing may become more common in the future.

Don’t Miss Out on Profit: Implement Dynamic Pricing for Your Business

As you can see, companies across sectors are discovering the potential of dynamic pricing. It is already becoming a standard, so you don’t have to worry about customer backlash, and it can maximize your margins at no cost. if you are interested you can read our article about the pros and cons of dynamic pricing here.

If you’re thinking of implementing such a strategy, you could probably use a support of a dynamic pricing expert. We would love to share our expertise with you, helping you design and implement a personalized, successful dynamic pricing strategy and pick dynamic pricing tools to work with. Just write to us!

About the author

Dorota Owczarek

Dorota Owczarek

AI Product Lead & Design Thinking Facilitator

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With over ten years of professional experience in designing and developing software, Dorota is quick to recognize the best ways to serve users and stakeholders by shaping strategies and ensuring their execution by working closely with engineering and design teams.
She acts as a Product Leader, covering the ongoing AI agile development processes and operationalizing AI throughout the business.

Would you like to discuss AI opportunities in your business?

Let us know and Dorota will arrange a call with our experts.

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Dorota Owczarek
AI Product Lead

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