Dynamic pricing balances product and inventory turnover with profitability based on variable factors that influence the timing and marginal gains from product sales. These include demand, seasonality and even competitor pricing.
Dynamic pricing is familiar for most customers in the context of airline tickets and hotel room pricing. Flights may be priced lower during weekdays or hotel room prices can go up during busy summer travel months.
Businesses are now expanding the use of dynamic pricing based on increases in the amount of data they collect on customer trends. Real-time pricing shifts are now possible due to powerful algorithms able to shorten predictions. Many companies may see potential for gaining higher revenues related to dynamic pricing, but opportunities also exist for other aims such as sustainability outcomes.
Types of dynamic pricing
There are different dynamic pricing approaches for companies to consider:
Variable pricing includes price increases and decreases based on demand shifts. It is the most familiar form of dynamic pricing.
Personalized pricing may include price variation for customers based on their personal demand history. This can include variables such as location, purchase behavior and browsing history.
Progressive pricing means adjusting pricing proportional to volume increases. Higher volumes are rewarded with lower pricing.
Game-theory approaches to dynamic pricing also exist, but they are often theoretical constructs that require customization for specific businesses.
Customer perception and dynamic pricing
The customer perception of dynamic pricing can be challenging to navigate, as customers are attuned to pricing fairness and affordability issues. Customers may mistrust companies for suspected “price gouging,” or justifying unreasonably high prices due to inflation or demand shifts, without concrete evidence of these dynamics.
Customers may also reject the premise of dynamic pricing in industries associated with constant demand, such as restaurants, affecting customer loyalty and relationships. In more extreme cases, such as raising rental prices after people have lost their homes to disasters, people can feel deeply mistreated.
Yet, dynamic pricing can also benefit customers through advantageous pricing at key times, presenting opportunities. Dynamic pricing can be used upstream to reduce supply chain costs, which can lower overall product cost for downstream customers.
Transparency around dynamic pricing models and the purpose of the dynamic pricing approach can help to address people’s fears of unfair pricing adjustments. Market research into the benefit for specific industries, processes and situational variables can yield ways to use dynamic pricing that are viewed positively with the right communications.
Sustainability and dynamic pricing
Dynamic pricing can be used as a way to influence customer behavior towards positive sustainability outcomes. Companies across diverse industries have started addressing sustainability outcomes with dynamic pricing. Their aims include reducing carbon dioxide emissions, energy consumption, waste, and balancing the renewable energy grid. Here are some examples.
Dynamic pricing use cases for sustainable outcomes
EV charging
Flat pricing can lead to peak demand periods where customers line-up at charging stations at the same time. These times don’t always align to peak energy supply periods from variable renewable energy sources. Dynamic pricing could influence EV owners to charge vehicles when renewables supply more energy and avoid congestion. EV charging points are expected to grow from 4 million to 35 million by 2030 in the US, so balancing the grids will become a more pressing issue with higher total energy consumption demand.
Reducing perishable food waste
In 2022, 19% of food available to consumers was wasted in retail stores, food service locations and households. Wasted food is a high source of carbon emissions, because it generates methane, a high warming potential greenhouse gas. Across 100 years, methane produces 28 times more global warming effects than carbon dioxide.
Researchers have modeled ways to use dynamic pricing as an approach to adjust prices for the purpose of selling food before it perishes and becomes waste. Based on inventory levels, shelf life, and consumer demand to identify optimal pricing for selling inventory while still fresh and useful to consumers. This strategy has the dual aims of improving grocers’ revenue while minimizing food waste. A new app, Wasteless AI, is now available to scale this concept commercially in grocery stores.
Supply chain management for green technology
Demand for green products has led to premium pricing on products with green characteristics. Researchers point out that these green characteristics often relate to process innovations within the supply chain, defining key product features. These include metrics such as use of recycled materials or product’s CO2 footprint. By using cost sharing strategies and dynamic pricing to lower supply chain costs based on competition, companies could lower supply chain costs, while still benefitting from premium pricing expected from customers based on green product value.
Dynamic electricity pricing
Utilities have introduced peak demand pricing schemes in various parts of the US that incentivize customers to shift their energy consumption habits. The aim is for household customers and businesses to plan their high-energy consuming activities (such as running laundry machines or ovens) during times when costs and overall grid demand is lower. This shifts peak demand to times that either align with renewable energy availability or simply to avoid unnecessary demand spikes. Demand spikes can harm the environment, because they may necessitate firing up high-emissions power sources rapidly. When natural gas supplies power up, for instance, they emit higher GHG emissions than during stable use periods.
Remanufacturing and circular economy
Remanufactured products are popular by demand for their sustainability characteristics and also subsidized by some governments for the same reason. However, manufacturers may view remanufacturing as a less certain alternative to standard manufacturing, due to its variable output and uncertainty related to returned products. Therefore dynamic pricing approaches to remanufacturing could support stronger adoption of remanufacturing within manufacturing processes.
Summary of sustainability insights for dynamic pricing
Dynamic pricing has potential for scaling production for sustainable products, lowering the cost of sustainable processes, and incentivizing these processes throughout supply chains. Dynamic pricing and its impacts on sustainability is at the frontier of sustainability innovation, which requires effective sustainability data analytics to model, assess and test in practice. This is where Atrius Energy and Sustainability can support your organization with our suite of software solutions.
