What do expensive airline tickets during the holidays, wind-up sweaters in the summer, and expensive next-gen technologies have in common? Their prices are all driven by a strategy known as demand-driven pricing – a methodology that tries to capitalize on the ebb and flow of what customers are willing to pay for a product or service at any given time. .
Here, we’ll explore the concept a bit further, go over some demand-based pricing methods, see some examples of the methodology in practice, and review its pros and cons. Let’s go.
What is on-demand pricing?
Demand-Based Pricing Any pricing method that takes into account fluctuations in customer demand and adjusts prices to accommodate changes in perceived value that accompany them.
Demand-driven pricing comes in a variety of forms – all united in the fact that they play on consumer demand. These methods can vary depending on several factors, including a company’s business goals, its place in its market, consumer preferences and the quality of its product.
The specific demand-based pricing method that a business will use is also based on How and when a company enters its market. Generally speaking, the original innovators will not apply the same methodology as those who make an economic alternative.
Find out more about what dynamic pricing is and how it can apply to your business in this video:
Here are some demand-based pricing methods that might be right for your business, depending on your business situation.
Demand-based pricing methods
Here, we’ll take a closer look at four main demand-based pricing methods: price skimming, penetration pricing, value-based pricing, and yield management.
1. Price skimming
Inflate prices is the practice of identifying and charging the highest price for a product that consumers are willing to buy and charge less over time. Thus, a business may price its product at a disproportionate level initially, but as new competition emerges and consumer surplus decreases, that business will gradually reduce its price to accommodate a growing customer base. more price sensitive.
The strategy is most often employed by the creators of new technologies. As competitors in these business spaces catch up or present their own alternatives, original innovators must adjust their prices to accommodate.
Featured Resource: Free Price Skimming Calculator
2. Penetration price
Penetration price is the process of attracting new buyers to a product or service by reducing its value in the initial offer and setting prices low. The intention is to create the perception of the value of this product compared to its competitors.
It’s a process based on the idea that lower prices can increase brand awareness, and once your brand has caught the attention of consumers, it will retain customers who have tried their luck on the product – even if the prices go up.
Featured Resource: Free Penetration Price Calculator
3. Value-based pricing
Value based Pricing is the process of pricing a product based on the quantity of consumers think it is worth it. The concept applies mostly to products designed to improve a customer’s self-image. Customers pay a price entirely based on their collective perception of its value.
It is often a question of the size of the product. Value-based pricing is what determines what may appear to be overpricing for high-end products. Yet, based on the breadth of its applications, it is a concept worth understanding.
Featured Resource: Free value-based price calculator
4. Performance management
Yield management is a strategy in which a business that sells fixed inventory resources in limited time windows attempts to price its product based on fluctuating demand levels as that period advances. This strategy is especially prevalent in the airline and hospitality industries, as tickets and room reservations typically become more expensive as their dates get closer.
It is based on the assumption that the scarcity and urgency that come with a limited, time-limited supply of a product weighs more heavily on consumers as availability decreases, making them more willing to pay higher prices. students.
Examples of demand-based pricing
The airline industry
The airline industry offers one of the most prominent everyday examples of demand-based pricing. Flight prices fluctuate depending on factors such as timing and seasonality.
For example, airlines generally charge higher prices for tickets to Las Vegas on New Years Eve than during most other times of the year. Why? Because they can, and people will continue to pay for them.
There is a greater demand for flights during the holidays – so much so that airlines can charge about twice as much as for those same flights a week later.
The price of admission to Disney World can vary quite drastically depending on the season. The park increases prices around Christmas, New Years and Easter. Conversely, prices in January and early February tend to be the cheapest.
The reasoning behind these price fluctuations is quite simple. The major vacations drive demand for tourist attractions like Disney World, while the latter part of January and the beginning of February immediately follow major travel seasons – when families have typically taken time off and have already traveled.
Apple typically uses price skimming with every new generation of iPhones it releases. He usually prices each new model at what appears to be a disproportionate cost.
As time goes on and the demand for new phones at that initial price decreases, the models get cheaper and cheaper. Eventually he pulls out a new iPhone model and the cycle restarts.
Advantages and disadvantages of demand-based pricing
Advantage: It can help you optimize income generation.
Each demand-based pricing brand is structured to get the most out of consumer demand. If you can implement a strategy that effectively capitalizes on the demand for your product or service – regardless of its position – you can put your business in a strong position to maximize revenue.
Disadvantage: It can take a lot of work.
Demand-based pricing is never completely intuitive. In most cases, you can’t build any of these strategies based on hunches and guesses – it takes intensive research and a fair amount of trial and error.
None of this comes easily. It’s a laborious and often stressful process – and if you’re not ready to commit to doing it right, you might be better off sticking with a simpler pricing method.
Benefit: Certain strategies can serve customers better by ensuring access to a fixed inventory.
This point applies specifically to performance management. By adjusting prices as a time-limited product nears the end of its availability period, you are essentially maintaining some access to the fixed inventory for that product. While the remaining units of this product are more expensive, they will still be there for last-second buyers – in many cases, this can increase customer satisfaction.
Downside: It can be extremely picky.
This one relates to the other downside listed here. Demand can be volatile and difficult to predict. Even with extensive market research behind your strategy, there is no guarantee that demand will turn out the way you expect. As I mentioned, trial and error is essential, but even the data you accumulate may not always be reliable.
Demand-driven pricing strategy
Demand-based pricing comes in a wide variety of forms that adapt to different business needs and market positions. It will take some thought and careful consideration to identify a strategy that is best for your business. Yet, whatever the nature of your business, it’s all about understanding the fundamentals of demand-based pricing.
Originally posted Nov 24, 2021, 7:00:00 AM, updated Nov 24, 2021
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HubSpot Inc. published this content on November 24, 2021 and is solely responsible for the information it contains. Distributed by Public, unedited and unmodified, on 24 November 2021 12:29:01 PM UTC.