Have you ever noticed how prices changed from the morning to the afternoon? For example, a restaurant has the same food but prices during the morning when it’s less busy compared to afternoon rush hour. That is an example of demand based pricing: where the demand dictates the price of the product.
In this blog, we’ll explore what demand-based pricing is in greater depth; the different types, real-world examples, and why it’s crucial for your business. Ready to dive in and see how this can boost your bottom line?
What Is Demand Based Pricing
So what really is demand based pricing?
The most layman explanation is it is a pricing strategy that changes with the demand for a product. It is also known as dynamic pricing because of how price changes to meet the current demand for the product.
Imagine you’re at a farmers’ market. Early in the morning, the fresh strawberries might be priced higher because everyone wants them, but by the afternoon, the price drops as vendors aim to sell out before the end of the day. This is demand-based pricing in action—prices rise and fall with the ebb and flow of consumer demand.
At its core, demand-based pricing uses real-time data and market trends to optimize prices. This isn’t just about setting the highest possible price; it’s about finding that sweet spot where the price meets customer willingness to pay. It takes a lot of predictive analysis to maximize sales and revenue, but companies across various industries use this approach to stay competitive and responsive to their customers’ needs.
Types Of Demand Based Pricing
There are many different types of demand based pricing. Just like how it is dynamic, the way it changes can be classified into different types. So here are the types of demand based pricing:
Type#1 Value-based Pricing
Value-based pricing revolves around the perceived value of a product or service to the customer rather than its cost. Picture a luxury watch—its price isn’t just about the materials or the labor that went into making it. It’s about the prestige, the brand’s history, and the status it confers on its wearer. Companies that use value-based pricing focus on creating and communicating value to justify higher prices.
Type#2 Dynamic Pricing
Dynamic pricing is the most fluid form of demand-based pricing. Prices change rapidly based on algorithms that take into account current demand, competitor prices, and other market factors.
If you’ve ever booked a flight or a hotel room, then you’ve experienced dynamic pricing. Airlines and hotels adjust their prices in real-time, depending on how many seats or rooms are available and how many people are looking to book.
Type#3 Price Discrimination
Price discrimination involves charging different prices to different groups of consumers for the same product. This can be based on various factors such as age, location, or time of purchase.
For example, movie theaters often offer discounted tickets to students and seniors. The goal is to maximize revenue by tapping into different willingness-to-pay thresholds among consumer segments.
Type#4 Geo-based Pricing
Geo-based pricing sets prices based on the geographical location of the buyer. This strategy considers the economic conditions, competitive landscape, and purchasing power in different regions.
For instance, online video game distributor Steam has different prices based on where the customer is from. The company might charge more in a country with a higher cost of living and less in a country where incomes are lower. This approach ensures that the product remains accessible for countries with lower wages and lower cost of living as a strategy for maximizing revenue potential.
Type#5 Price Skimming
Price skimming involves setting a high initial price for a new product and then gradually lowering it over time. This strategy is often used for innovative or high-tech products. Early adopters, eager to be the first to own the latest gadget, are willing to pay a premium.
As the product moves through its lifecycle and competition increases, prices drop to attract a broader customer base. For example, take the phone industry. A new model comes out this year, but next year another flagship model will be released with higher specifications. The older model will then gradually decrease in price to attract more customers to buy it while offering the new model to those that want an upgrade.
Type#6 Penetration Pricing
Penetration pricing takes the opposite approach to price skimming. Here, a company sets a low price to enter a competitive market and attract customers quickly. The goal is to build market share and customer loyalty rapidly. Once the brand is established, prices may be gradually increased. This strategy is common in subscription-based services, where initial low prices hook customers to build a pricing ecosystem where customers continue to pay as the prices rise.
Type#7 Yield Management
Yield management, often seen in the travel and hospitality industries, involves adjusting prices based on anticipated demand to maximize revenue. Airlines and hotels, for example, use sophisticated algorithms to predict demand fluctuations and set prices accordingly. During peak travel seasons or major events, prices soar, while they drop during off-peak times to fill as many seats or rooms as possible.
Real-World Industry Examples Of Demand Based Pricing
To really understand how demand based pricing works, looking at some industry examples can help you visualize the extent of their effect.
1. Airlines
Airlines are the quintessential example of demand-based pricing in action. Ticket prices fluctuate based on a myriad of factors including booking time, seasonality, demand for certain routes, and even competitor pricing.
Let’s look at an event like the Olympics. Many people will naturally go to the host country to watch the events last. Now think about when customers are booking flights. If they are booking a flight months in advance for a popular holiday destination, prices will be generally cheaper. But if someone wants to book a flight closer to the start of the event, airlines companies will hike up the price because the demand is considerably higher. These real-time adjustments in prices reflect a company’s motivation to increase profits as much as possible.
2. Ride-Sharing Services
Companies like Uber and Lyft utilize dynamic pricing, often referred to as surge pricing. During high-demand periods, such as rush hours, bad weather, or major events, prices increase to balance demand and supply.
For example, during a rainstorm or a big concert, you might notice that your usual ride home costs significantly more than usual. This surge pricing incentivizes more drivers to hit the road, ensuring that customers can get a ride when they need it most, albeit at a higher price.
3. E-commerce
Online retailers frequently use demand-based pricing to stay competitive and boost sales. Platforms like Amazon adjust prices dynamically based on factors such as competitor pricing, inventory levels, and consumer demand.
This is more prominent during the holiday season like Christmas or promotional events like Black Friday. Prices drop to attract more customers, while scarce items in high demand might see price hikes to get as much profits as possible. These real-time adjustments help e-commerce businesses optimize their sales and inventory management.
4. Hospitality Industry
Hotels implement yield management strategies to adjust room rates based on anticipated demand. During high-demand periods like holidays, major conferences, or local festivals, hotel prices can skyrocket.
Conversely, hotels might offer significant discounts to attract guests and maintain occupancy rates during off-seasons. For example, a beachfront resort may charge premium rates during summer vacation months but offer lower prices during the winter to fill rooms.
5. Sports and Entertainment
Ticket pricing for sports events, concerts, and theaters often follows a demand-based model. Prices vary depending on factors such as the popularity of the event, the performing artist, and the timing of the ticket purchase.
Think of the NBA Playoffs compared to the regular season. Ticket prices during the Playoffs are much higher because there will be fewer games with higher stakes. This increase in value for customers means teams can charge higher ticket prices that customers will buy. The regular season will have lower ticket prices, but might see hikes when two popular teams are playing. This perception and sensitivity to value is how sport teams can earn higher profits based on value.
Importance Of Demand Based Pricing – 6 Ways You Can Improve Your Business Operations
Demand-based pricing is more than a clever strategy because of the importance it carries for your business.. Let’s explore why demand-based pricing is so important.
- Maximizing Revenue
- Enhancing Competitiveness
- Improving Customer Satisfaction
- Efficient Resource Allocation
- Encouraging Innovation
- Real-Time Market Insight
Way#1 Maximizing Revenue
Maximizing revenue is a fundamental goal for any business, and demand-based pricing can help you achieve that. By adjusting prices according to the fluctuations in demand, you get to capture the highest possible value from your products or services at any given time. When demand is high, higher prices can be charged to increase profit margins. During low demand periods, prices can be reduced to stimulate sales and maintain cash flow. Simple enough to understand. But the importance lies in the way demand based pricing matches market fluctuations.
Way#2 Enhancing Competitiveness
Competitive markets keep you on your feet. It is all about quick responses and adapting to change. The ability to swiftly respond to changes is crucial for maintaining and enhancing competitiveness. Demand-based pricing allows businesses to adjust their prices in real-time based on market dynamics and competitor actions. This agility ensures that you can attract and retain customers by offering the best value at any given moment.
A practical example of this can be seen in the smartphone industry. When a new, highly anticipated smartphone model is released, retailers using dynamic pricing can quickly adjust their prices for older models to make them more attractive to cost-conscious consumers. Additionally, if a competitor drops the price of a similar model, the retailer can promptly respond by adjusting their own prices to remain competitive. It is all about keeping up with future trends to best serve your customers which demand based pricing allows for your business.
Way#3 Improving Customer Satisfaction
While it might seem counterintuitive, demand-based pricing can significantly enhance customer satisfaction. Although customers might grumble about price increases, these adjustments reflect the rising costs from manufacturers due to increased demand. If your business continues to sell at outdated prices, you’ll face insufficient capital for restocking products. Consequently, when the next wave of customers comes in and finds that items are out of stock, they will likely become frustrated and turn to competitors who can meet their needs.
Way#4 Efficient Resource Allocation
Spreading yourself too thin on your resources can leave your business suffering because you are not allocating resources in the right places. But, by understanding when and where demand is highest, you can plan their production, staffing, and inventory management more effectively. Allocating resources based on demand pricing ensures you are on top during peak times and not overextending business resources for low-demand periods.
The hospitality industry is a great example of allocating resources based on demand based pricing. Hotels exemplify efficient resource allocation through yield management. During high-demand periods such as holidays, hotels can increase room rates to capitalize on the influx of guests. This additional revenue can be reinvested in hiring more staff, enhancing amenities, and improving overall guest experiences while doing the opposite during off-seasons. This approach helps hotels balance their resources, ensuring they can provide excellent service while optimizing revenue throughout the year.
Way#5 Encouraging Innovation
Without innovation, your business will fall behind competitors. Think of it like this; your competitors are selling a similar product at a lower price, while you have the same price. Customers are bound to move to competitors because of the attraction of a lower price for a similar product. In the end you are losing business and your rival is scaling their business for expansion.
Adopting a demand-based pricing strategy encourages your business to continuously innovate. To effectively implement this pricing model, you need to invest in technology and data analytics to stay ahead of the curb. This not only improves their pricing strategies but also enhances their overall business operations.
Way#6 Gather Real-Time Market Insight
Demand-based pricing provides your business with real-time insights into market trends and consumer behavior. This is key to scaling up your business because you have real-time data to make logical predictions to stay ahead in the market.
By constantly monitoring and adjusting prices, you are able to gather valuable data that can inform other strategic decisions. This continuous feedback loop helps you anticipate market changes, future customer needs, and make informed decisions about product development, marketing strategies, and expansion plans.
For example, an e-commerce platform that tracks price sensitivity and sales volumes can use this data to identify emerging trends and adjust its product offerings accordingly. If the platform notices a surge in demand for eco-friendly products, it can expand its inventory to include more sustainable options and tailor its marketing campaigns to highlight these items. You can cater to a new customer base and make a compelling offer to make them loyal customers in the future.
How You Can Best Utilize Demand Based Pricing With A Bulk Order App On Shopify
Conceptually, demand based pricing is great. But, how are you going to implement it? Changing prices for a brick and mortar store is simple enough. All you have to do is change the price tags and put up promotional posters and market it. However, it is not so simple for e-commerce stores. You have hundreds of products, which have their own variants and changing prices for each variant is time consuming. Not to mention that human error could cause problems as well!
On Shopify, you can handle inventory very easily. But having all the variants show up on one page and then having different prices for each variant based on demand is tricky enough. Again, the time and money needed to both implement and maintain such a process makes it inaccessible for all business types. That is where a bulk order app on Shopify could save your business from all these unnecessary headaches!
Here is an example of a bulk order app that does exactly that:
There is a lot going on so let’s go over them color by color. First you might notice the green section. That is the two variant options for the product: color and size. You can see there are 4 colors and 4 sizes but there are more that you would have to scroll through. This app lets your business exceed the Shopify variant limitations and have as many variants as you want on one product page. So customers are spending less time flipping through tabs and instead focused on making a purchase decision.
Next let’s talk about the red. The red is where the customers are making their choices via the input quantity field or the increment button to select the quantity for the particular color-size variant. You will notice here that the prices are different across the variants. This is where you can add the demand based pricing scheme for your business. You can set up the price for each individual variant to have a different price. Basically, you are mixing and matching the variants in one product page but basing prices on the demand. All variants, one page, different prices, and you are implementing demand based pricing with ease on your Shopify store!
But hold on! The yellow section is telling the customers they must choose 12 products before they can add to cart or checkout. This is the minimum order quantity feature of this app that allows your business to set up an MOQ to restrict customers into buying a minimum order. This is exactly what businesses need when they have bulk orders for their business. So until 12 total quantities are not selected, customers cannot add the product to cart. You get to maintain your profit margins while providing a smooth intuitive shopping experience for your customers!
Lastly, the orange section is the in-stock badge option. It shows if a product variant is in stock or not. It’s great because customers have a visual and bold representation of in-stock items. It makes their purchasing decisions much easier because they can quickly identify which are in stock so it does cause a hassle while shopping.
While it might not be directly related to demand based pricing, you could definitely use the app to showcase high-demand variants with increased price and low-demand variants with lower prices. What you are doing is essentially help create demand for the less popular variants. It helps you clean out your stocks much faster and manage your inventory more efficiently!
With just one app, you are implementing a demand based pricing strategy with ease while also getting added features that you could use for your store!
Bottom Line
From maximizing revenue to keeping customers happy, demand based pricing strategy helps businesses stay ahead. Real-world examples show its effectiveness across industries, and tools like Shopify’s bulk order apps make it easy to implement. Embrace demand-based pricing to meet customer needs, stay competitive, and drive growth for your business!
