Dynamic Pricing: The Ultimate Guide

Time-based pricing is a pricing strategy that sets prices in line with varying levels of consumer demand throughout the day or year.  

This strategy is often used in industries that are significantly reliant on time and seasonality for profitability, such as the hospitality, airline, and transportation services sectors. 

Adjusting prices according to consumer buying trends throughout the day, week, or year, time-based pricing taps into buying impulses and creates a sense of urgency that drives sales. From Friday night surcharges on rideshares to premium prices for plane tickets during holiday periods, time-based pricing propels customers to buy now, not later, to get the best deal. 

Peak pricing, or surge pricing, is a strategy that pushes prices up in times of high levels of consumer demand, used to manage fluctuating supply and demand levels profitably. Think of premium pricing in rush hours, traveling between the months of May and August, or when a major sports event comes to town. On the other hand, when demand is at an all-time low, prices will also be at their lowest. 

In times of low supply and high demand – for example, when hotels are nearly booked for a popular concert, but scores of people still need rooms – companies use peak pricing to capitalize on the situation and offer their services amidst limited options at peak prices.  

Common examples of peak pricing come from the ridesharing giant Uber, the hotel industry, and most commercial airline companies.  

Penetration pricing is a dynamic pricing strategy used to quickly gain market share for a new product by offering a lower price at the beginning, which entices customers while effectively pricing out other competitors, and then raising that price gradually. Penetration pricing is a dynamic pricing strategy insofar as it treats price as flexible in order to meet market conditions and stay competitive.  

Netflix built up a loyal consumer base with its low subscription costs, in turn disrupting and eventually dominating the streaming market. The strategy is also commonly used across B2B industries, such as the chemical sector for specialty chemicals to incentivize buyers, or in technology manufacturing (for example, Huawei’s strategy for penetrating the European market involved offering its phones at highly discounted rates). 

Penetration pricing, or starting at low prices first, is useful when there is either little product differentiation, demand for your products is highly price-dependent, or when your products cater to a mass market.  

Personalized pricing involves tailoring prices for each customer based on their location, historical buying behavior, and demographic information. In other words, companies take note of how a consumer engages with their products and how much they’re willing to pay for them to offer customized prices. 

To illustrate, consider a car dealership. A salesperson might observe how a customer dresses, what they do for a living or where they live, or what kind of car they’ve driven previously, to gauge the price this customer would be comfortable paying for their next car.   

This approach can also be employed in other industries, like e-commerce, and might take the form of offering tailored discounts or coupons to certain customers. An e-commerce platform might share promotional offers for select products to customer groups that have previously shown interest in them, or propose bundled deals for combinations of frequently purchased products, with the aim of optimizing sales and revenue.  

A location-based pricing, or geographical pricing, is a strategy that considers customer location to adjust prices based on differences in factors like willingness to pay or economic conditions across regions.  

Location-based pricing is used to some degree in most industries. For example, a subscription service like Netflix charges different monthly or annual rates based on the customer's IP address. Similarly, electronics manufacturers such as Apple might adjust the prices of their MacBooks and iPhones according to factors like average willingness to pay, demand, and local regulatory requirements.  

Some location-based strategies can consider what neighborhood or even street corner that customers are in to calculate prices – take most ridesharing apps today, where simply crossing the street for pick up might save a few dollars. 

Event-based pricing is a dynamic pricing strategy that involves adjusting prices depending on the events at the time, such as major holidays, festivals, concerts or sports championships, and even weather conditions.  

This strategy is often used in the travel industries to price based on fluctuating demand. Hotels and airlines increase their rates during peak travel seasons between May and August, and conversely, offer their lowest rates in off-peak periods. Additionally, they take note of events throughout the year and adjust prices for their services when a popular sports event, performer or conference comes to town. 

Price discrimination is a pricing strategy that involves setting different prices on the same product for different sales channels or customer segments. It exists in three forms, or degrees: 

• First-degree price discrimination: This strategy involves setting a maximum price based on the specific channel of customer group. 
• Second-degree price discrimination: Here, price is based on the quantity. The more product purchased, the lower the price per unit, encouraging customers to buy more.  
• Third-degree price discrimination: For this strategy, prices are based on an individual consumer’s characteristics, such as age, student or non-student status, or gender, with the purpose of attracting specific customer groups.  

Remember, because price discrimination should benefit consumers, not put them at an unfair disadvantage, make that your price discrimination strategy is designed to reflect this.