Decisions about pricing have a very real impact on sales volumes, revenue and profitability. You've likely heard the terms revenue management and dynamic pricing before, but what do they mean exactly? And how do they drive revenue?
What is revenue management?
Simply put, revenue management is when you predict or anticipate customer behaviour, and then optimize your pricing, product availability and distribution to maximize the revenue you're able to earn. To be successful, you need good data and analytics to identify patterns and forecast accurate levels of demand. This means understanding who your customer is, how they think and how much they value your product.
What is dynamic pricing?
Dynamic pricing solutions use algorithms to calculate and adjust prices in real time. They help you set prices as often as you need to respond to the market in order to maximize your revenue. Dynamic pricing is often confused with revenue management. They do seem the same at first, but dynamic pricing actually fits under the umbrella terms of revenue management.
As pricing becomes increasingly more difficult due to competitive pressures, fluctuating market demands and the emergence of subscription-/usage-based services, more companies are turning to strategies that include dynamic pricing.
5 Ways to Predict Demand When the World Is Unpredictable
Revenue management relies on historical data to provide insights and patterns into consumer behaviour. During the COVID-19 pandemic, demand forecasts were shattered. Some goods were in demand while others fizzled out. That uncertainty remains today.
Here are five ways to ensure your demand forecasts are accurate:
Find alternative data sets
Consider using data sets from other 'unstable' times in the market, such as after a hurricane, with real-time data from sales.
Tap local knowledge
Data collected should include local knowledge as unique factors could be at play.
Embrace ensemble modelling
Combine the predictions from different models to suggest a point estimate, or reasonable range.
Test and test again
Validate results by testing quickly and often. For example, simple A/B tests offer both speed and flexibility.
Choose the right pricing partner
A cloud-native pricing solution provides you with a single source for all your pricing data, automates tedious data mining, allows you to test different pricing strategies and helps you respond to market fluctuations in real time.
Advantages of using Dynamic Pricing as a Revenue Management Strategy to Increase Profits
Keep pricing accurate
Improve customer insights
Most think of dynamic pricing as a way to increase prices, but there are circumstances where decreasing your prices can trigger more sales. Think of a flash sale that can help meet sales revenue targets.
In times of low sales where there is a risk of little or no profit, an item is offered at a lower price. This allows you to maximize profit when demand levels are highly variable. Hotel and airline industries use this approach.
Keep pricing accurate
When raw materials, transportation fees or other external factors cost more, dynamic pricing takes these into account, ensuring that your pricing is accurate and your margins are protected.
Improve customer insights
Dynamic pricing can help you collect more accurate information about how much your customers are willing to pay. This valuable data can be used to increase your sales.
How to Implement Dynamic Pricing Successfully
There are six components that organizations must consider and manage well to be successful using dynamic pricing in their revenue management strategy.
Set a realistic pricing strategy that is well aligned with your capabilities, products and competitive position. For example, it doesn't make sense for a small player to be a low-cost provider.
Consider external factors such as culture. Different cultures and businesses have a variety of attitudes toward fixed and negotiated pricing.
Gaining alignment from all relevant stakeholders will ensure your success. For example, ensure sales incentives properly align with price optimization objectives.
To be most effective, consider establishing a cross-functional team to evaluate pricing strategies and processes on an ongoing basis.
Easy, rapid access to historical deal data is a must to support the use of pricing algorithms (including pricing, volumes, add-ons, cross-sales and terms and conditions).
The right pricing solution can help you deploy and maintain dynamic pricing to ensure success. A cloud-native solution sets pricing controls, keeps data organized and alleviates many of the human tasks of managing pricing.