Dynamic pricing: In-depth Guide to Improved Margins [2018]

Dynamic pricing allows large and small companies improve their margins quickly. Any corporate leader needs to know about dynamic pricing and we answer all dynamic pricing questions here:

Basics of pricing:

Dynamic Pricing:

Implementing dynamic pricing at your company:

What are traditional approaches to pricing?

Sellers used to set the price for a product or service based on a manual analysis of the cost, demand, supply or competition. Without sophisticated algorithms, two pricing strategies were common:

  • Premium Pricing: Premium pricing is where companies set the price higher than average competitive price. The key factor for the success of this strategy is differentiation. Premium pricing effectively works when the product has a unique feature that differentiates it from similar products in the market and has a competitive advantage.
  • Penetration Pricing: Penetration pricing is basically setting the price relatively lower than the market competition. Companies use this pricing strategy to raise brand awareness and increase customer loyalty. Initially, penetration pricing may cause revenue loss but the main goal of this strategy is market penetration.

Profit maximization is not always possible with both strategies. At premium price level, demand would be low. Even if you have a high demand for penetration pricing, the price will remain low.  What if you can cover all the price segments and respond faster to demand fluctuations in the market? This is possible with price discrimination. Read more

Dynamic pricing is the strongest profitability lever for a large company

It is difficult to improve financials of a large business.

Decreasing costs are a sure way to improve financials however it is difficult to find and implement cost cutting opportunities. Cost saving opportunities fall in these buckets

  • Long term investments: Finding areas to reduce operational costs with investment is easy. Investment in new systems and tools can reduce labor-intensive processes, improve operations and customer experience. Investment in new facilities can provide scale synergies and help save costs. However, it is difficult to convince top management to invest in the future given short term focus of Wall Street and most businesses. Wall Street’s focus has some merit, long term investments, especially technology investments have been documented to fail to deliver the planned benefits.
  • Short term fixes: Headcount reductions, procurement transformation programs all fall under this bucket. They definitely impact costs but their impact on other parts of the business can be difficult to predict.

Increasing revenue growth is difficult for a large business because growth is the primary motivation for most businesses. All large businesses experienced strong growth to become large. In the quest to sustain growth, every imaginable lever gets implemented by businesses. Therefore, a large business founded several years ago had enough time to create a very effective growth machine given its competition, regulatory landscape and other constraints. Read more