Key Differences and Best Practices:
In the ever-evolving landscape of pricing strategies, businesses are constantly seeking ways to optimise their revenue and remain competitive. Two commonly discussed approaches are variable pricing and dynamic pricing. While these terms are sometimes used interchangeably, they represent distinct strategies with unique applications and implications. Understanding their differences and determining which is best suited for your business can significantly impact your bottom line.
Variable Pricing:
Variable pricing refers to a strategy where prices are set differently for different products, services, times, dates or customer segments based on predefined criteria. These criteria can include factors such as product features, production costs, or target markets. This approach is relatively static; once prices are set based on these variables, they do not change frequently.
Key Characteristics of Variable Pricing:
- Segmentation: Prices are determined based on customer segments, product features, or other predefined variables.
- Stability: Prices remain consistent over a period of time unless a significant change in the predefined variables occurs.
- Predictability: Both businesses and customers can predict prices, making budgeting and planning easier.
Examples:
- Airlines: Offering different prices for economy, business, and first-class seats.
- Retail: Charging different prices for the same product in different geographical locations based on cost of living and demand.
- Admissions: Different pricing based upon defined criteria such as early bird discounts, late booking options, free after 3, slow Mondays.
Dynamic Pricing:
Dynamic pricing, on the other hand, is a more flexible approach where prices are continuously adjusted in response to real-time supply and demand conditions. This strategy leverages advanced algorithms and data analytics to modify prices based on various factors such as competitor pricing, time of day, seasonality, and customer behaviour.
Key Characteristics of Dynamic Pricing:
- Flexibility: Prices are frequently adjusted based on real-time data and market conditions.
- Optimisation: Businesses can maximise revenue by responding quickly to changes in demand and competition.
- Complexity: Implementing dynamic pricing requires sophisticated technology and data analysis capabilities.
Examples:
- E-commerce: Online retailers like Amazon frequently adjust prices based on competitor pricing, inventory levels, and customer browsing patterns.
- Ride-sharing: Companies like Uber use surge pricing to increase fares during periods of high demand.
- Admissions: Venues use such criteria as event popularity, volume of sales, last minute deals.
Key Differences Between Variable and Dynamic Pricing:
While both strategies aim to optimise pricing for maximum profitability, their fundamental approaches and applications differ:
- Basis of Pricing:
- Variable Pricing: Based on predefined criteria and segments.
- Dynamic Pricing: Based on real-time data and market conditions.
- Frequency of Changes:
- Variable Pricing: Infrequent changes, relatively stable over time.
- Dynamic Pricing: Frequent adjustments, highly flexible.
- Implementation Complexity:
- Variable Pricing: Easier to implement, requires less technological infrastructure.
- Dynamic Pricing: Requires advanced technology and data analytics, more complex to manage.
- Customer Perception:
- Variable Pricing: Customers may find it easier to understand and predict.
- Dynamic Pricing: Can lead to confusion or frustration if customers perceive prices as unfair or unpredictable.
Which is Best?
Choosing between variable pricing and dynamic pricing depends on various factors, including the nature of your business, your target market, and your technological capabilities.
Variable Pricing is Best If:
- You operate in a market with relatively stable demand and limited competition.
- Your customers value price predictability and transparency.
- Your business lacks the technological infrastructure to implement real-time pricing adjustments.
Dynamic Pricing is Best If:
- You operate in a highly competitive and fluctuating market.
- You have access to robust data analytics and technology to support real-time pricing.
- Your business can effectively communicate the rationale behind price changes to avoid customer dissatisfaction.
I make no secret of the fact that I feel the move to Dynamic Pricing is really an alternative way of implementing Variable Pricing. You could argue that this is because Merlin® has had Variable Pricing working well now for over 10 years and therefore I’m biased. That could be a relevant view but in all those years what I’ve found is the users of our system have had all the control and flexibility they have needed to control both visitor numbers and ticket prices. In addition, and more importantly, they have never been criticised for not being transparent with their pricing model nor have they had massive negative feedback on social media for ‘ripping off’ their customers.
Does Dynamic Pricing really work? Ask all those who tried to book tickets for the Formula 1 race at Silverstone last year, where in many cases ticket prices were actually rising as people waited on the internet to pay – in some cases by as much as 50%! It’s fair to say that social media was full of condemnation for this practice. Is that how you want to treat your customers?
Conclusion:
Both variable pricing and dynamic pricing offer unique advantages and challenges.
Variable pricing provides stability and predictability, making it easier for businesses to manage and for customers to understand.
Dynamic pricing, while more complex, offers the potential for significant revenue optimisation by adapting to real-time market conditions.
Ultimately, the best pricing strategy for your business will depend on your specific context and goals. By carefully evaluating your market dynamics, customer preferences, and technological capabilities, you can select the approach that will best enhance your competitive edge and profitability.
