Dynamic pricing model example: The Difference Between Static And Dynamic Pricing
If you want a pricing strategy to beat the odds, you’ll need to seriously consider a dynamic pricing model example to accelerate EBIT growth in your business.
Not only will you bring more pricing intelligence to your business. You’ll help your sales teams win more profitable sales (B2B). And, you’ll also attract more loyal consumers to your brand (B2C).
From BP, AGL, DHL and Toll Logistics to Amazon Best Buy, Uber’s surge pricing and Ticketek dynamic ticket pricing, it seems there’s been more awareness of dynamic pricing model examples and pricing strategy in Australia over the past two years. Even physical supermarkets like Coles, and Woolworths are considering a dynamic pricing model example. What’s driving that interest to move from static pricing to dynamic pricing?
Our research shows that pricing teams in both B2B and B2C markets are embarking on a new mission. One which requires pricing teams to develop and implement an effective dynamic pricing model example for their business. We see a definite trend away from static pricing and cost-based pricing structures to dynamic pricing.
Pricing decision making benefits hugely from pricing tools and dynamic pricing model examples
Static pricing and cost plus thinking is just not cutting it anymore.
In this article, we’ll look at the difference between static and dynamic pricing. We will give you a dynamic pricing definition and dynamic pricing model examples. Followed by real world dynamic pricing case study examples. Finally, we’ll evaluate the two pricing approaches and look at the advantages and disadvantages of fixed pricing and dynamic pricing.
We believe that advanced pricing analytics including dynamic pricing models do not replace pricing teams with expert knowledge and pricing skills. And, that to be able to really make dynamic pricing work in your industry, you need the right pricing structure in place first. Ultimately, you still need a world class pricing function and sales team to inform strategy and segmentation even if you have invested in new pricing tools and systems.
Dynamic pricing definition
A technical dynamic pricing definition is a dynamic pricing model example which updates prices frequently based on changing supply or demand characteristics. With the aim of balancing throughput and capacity utilisation.
A strategic dynamic pricing definition is a pricing strategy that businesses use to adjust prices quickly and more effectively.
A dynamic pricing definition is when a seller moves prices up and down quickly. They can charge similar customers different prices for the same product or service.
We would estimate that about 50% of businesses in Australia now use some form of dynamic pricing model example to improve overall price decision making capability.
We find that businesses that effectively implement dynamic pricing models consistently generate at least 1.5 – 3 percentage points of additional EBIT per year.
B2C dynamic pricing model example
Some pretty common B2C dynamic pricing model examples, include: Easy Jet dynamic pricing and Qantas dynamic pricing.
Both of these airlines have a dedicated pricing and revenue management function to set and manage prices on a daily basis. The primary role of the pricing and revenue management team is to manage, operate and refine a sophisticated revenue management system to maximise revenue and individual flights.
Over a number of years, Easy Jet dynamic pricing model has set prices on a very granular level (often for individual customers). Easy Jet’s dynamic pricing model enables the pricing team to optimise or adjust prices according to certain rules such as: customer segmentation at any time and/or amount of time until departure for any customer segment.
Dynamic pricing hotels and other capability-constrained service producers like Telcos have long used dynamic pricing models to balance capacity utilisation as well. Airlines use dynamic pricing to manage their time-based inventory (i.e., seats on flights). Utilities businesses use temporal dynamic pricing model examples to encourage their customers to buy in off-peak hours and to monitor capacity, supply and demand.
B2B businesses increasingly use dynamic an pricing model example.
Typically, B2B industies that use a dynamic pricing example include: Energy, Fuels, commodities, Grain, Agricultural Chemicals, Freight, Transportation.
These companies use dynamic for the following reasons:
- The value of the product varies in different market segments (commodities market / trading)
- The product may be perishable or product waste occurs
- Demand has seasonal and other peaks
- The product is sold both in bulk and on the spot market
Typically, B2B businesses implement a dynamic pricing model example to balance capacity utilisation and demand. Very few B2B businesses have figured out how to implement dynamic pricing to optimise revenue in the spot pricing market or across different customer groups.
We have seen a couple of B2B companies in Australia re-thinking their approach to pricing dynamically (predominantly in the Energies, freight and transportation markets). Their aim is to generate more value for the business and its customer by figuring out their customer segments.
Leading B2B companies in Australia are extending their temporal pricing model based on cost, supply, trading and capacity. They are now in the process of figuring out how to serve multiple customer segments with a fixed asset to improve revenues by setting different prices for each segment.
B2B pricing transformation in Australia
A handful of B2B pricing organisations are now in full swing of continuous improvement. We see AGL, Toll, DHL all re-designing and on-boarding different skills on their pricing teams. All these businesses are committed to the process of systematically collecting and organising enough data on deals to pursue dynamic pricing.
Even now, few of them, have the transactional, real-time pricing or behavioral data required. They are a bit behind major retailers, airlines, and other companies that make millions of sales a year. But B2B commercial leaders are tapping into internal and external databases and other online sources to understand target segments, competitors, price boundaries, and the details of previous deals.
And with new data in hand, leading B2B companies in Australia are using advanced analytics to manage growing complexity and act more quickly in today’s more competitive marketplaces.
Hoyts’ dynamic pricing model example
But did you know that Hoyts (owned by the Wanda Group) have even introduced a dynamic pricing model example in Australia?
Yes, even a physical cinema is using a dynamic ticket pricing. A trend that is expected to be introduced in our supermarkets. (Look out for a dynamic pricing model example being trialled in Coles and Woolworths stores. Probably in affluent areas first like: Neutral Bay, Crows Nest, Double Bay.)
A couple of years ago, Hoyts introduced electronic shelf labels, or ESLs to trial a dynamic pricing model example in Hoyts Chatswood (i.e, dynamic ticket pricing).
Hoyts Chatswood use ESLs displays like this: They display the price of the movie tickets behind the counter to reduce the need for paper tickets and to track demand or capacity levels. Prices on a screen can be changed easily and frequently. ELT’s enable dynamic ticket pricing in physical stores and cinemas. Hoyts also use ELT’s for their food and drinks sales as well (we will discuss this later in the article).
Hoyts chatswood initially encouraged people to buy movies tickets online by only offering discounts online. They also charge people significantly higher prices for tickets when they turn up at the counter asking for last minute tickets (i.e., like the airlines dynamic pricing model and the hotels dynamic pricing model).
Getting stung with a hefty price at the counter educates people quickly to different buying behaviours
People soon learned that going online was a far cheaper way of buying movie tickets at Chatswood Hoyts. In no time at all, people stopped turning up at the door expecting to buy tickets. They had changed a habit of a life time (some old habits do die quickly with the right price point).
Once Hoyt’s got people buying tickets online, they then had visibility on demand. This helps the pricing team to forecast future demand and balance capacity. The accountants were then able to manage and forward project cash-flows. Essential in a declining industry like cinemas.
Capacity is now a much bigger issue for Hoyts than ever before
Hoyts obviously made an executive decision to remove a large proportion of seats from Hoyts Chatswood cinemas and replace them with reclining seats.
They changed to reclining seats to delight their customers with extreme comfort. But they also bought recliners for Hoyts Chatswood because they wanted to differentiate themselves from other cinemas.
They were right. People do love their reclining seats, especially the kids. Most cinemas have the older, up-right seats. Their older, they are uncomfortable. Limited value proposition.
However, having less seats could have seriously risked Hoyt’s hard earned volumes and potentially their revenue. They are expensive and the massively reduce the number of seats in each cinema by at least half.
Interestingly, the price trials showed a different story on capacity utilisation.
Hoyts certainly didn’t want less volume and revenue by changing the seats. Especially as they are accelerating efforts to transform in a declining industry. So, what they did was gradually increase prices overtime using a dynamic pricing model.
The impact of Hoyts’ dynamic pricing model has been quite subtle until fairly recently
They have been adjusting prices in small increments and tactically discounting over the past 2 years or so to flip between pushing more volumes or generating more margin per seat.
Electronic pricing labels have been a great way for Hoyts to make more profitable sales overall too. They have introduced an electronic menu behind the popcorn counter with no prices. No pricing means no one knows or understands the price of the food and drink they are selling on the day. Even the staff don’t seem to know the real price of popcorn in the cinema.
The amazing result of the price trial, however, was that customers didn’t know the prices and still bought food and drink
People knew it was expensive. They had a feeling it was not the same as before. However, they were still willing to buy food and drink without knowing the price. Inelastic demand for all food and drink, not just popcorn. A pure profit play.
Why were some people still buying the food? The risk drivers of not buying the food were too powerful. Possibly screaming kids that want sweets and ice cream now. Parents that can’t say no. A couple that see the Hoyts cinema Chatswood experience as a special occasion… Or teenagers that have been given spending money and don’t really understand the value of money…
But are reclining seats really enough to justify Hoyt’s extremely high prices across the board?
Hoyts introduced dynamic pricing at the same time they introduced their reclining seats. They probably introduced the two together to give people the sense they were getting tangible value for their money. Luxury, comfort, an experience like the theatre…
First, other cinemas can copy this idea and buy recliners too. Many don’t because it’s a big CAPEX investment (which is why Hoyts are probably not introducing recliners in their other cinemas). And, when you compare movie prices to a couple of years ago, you’ll be staggered to find that movies prices for a family at Hoyts Chatswood is now circa. $80 – $90. 2 year ago a family ticket was circa $50. A 60% price increase.
Hoyt’s have also completely phased out discounts for kids and families. The price changes daily for tickets and frequently for food and drinks. The total cost of $80 doesn’t include drinks or pop corn either. A day out in the cinema is now an expensive past time, which could be up to $150 for a family if they buy tickets, popcorn, drinks and sweets on the premise.
Ironically cinemas were designed to entertain the masses on a cheap day out. Now it’s designed to entertain a small mirco-segment who are happy to pay a large sum of money without knowing the prices of anything.
The difference between static and dynamic pricing
Over the last three years we have worked with a number of companies in Australia to set up advanced pricing and revenue management functions. We have also help business’ set up pricing functions transitioning from static pricing to dynamic pricing capability (i.e., with data extracted from ERP systems, data / information hubs and/or internet purchasing data.) – see blog on pricing tools software.
If you are not sure of the difference, here’s a brief explanation of static or fixed pricing and dynamic pricing models:
Static pricing is a single price point.
Static pricing can also be a fixed-charge pricing model. Fixed-charge pricing gives customers open access to a product who pay a single price, such as paying one price for a magazine subscription or all you can eat buffet.
The benefit of static pricing used within a fixed-charge pricing model is that customers who make more use of the product or offer, pay a lower per-portion or per-use price than customers who make one off purchases.
Static pricing can also include two-part pricing.
Two part pricing includes both a fixed charge and a per-unit charge, such as paying a fixed amount to rent a car plus an additional amount for each mile driven. There two prices are often set so that customers who buy more units of a product pay less per unit than those who buy fewer units.
Costco is a good example of static, two-part pricing model. They make customer pay a fixed member fee upfront. The more items a customer purchases, the lower the per-item amount of the member fee.
Static pricing is based on 3 important factors:
- How customer’s perceive the product’s value,
- its costs,
- and the customer price sensitivity
These factors all contribute to the profitability of giving lower per-unit prices to customer who purchase larger product quantities or volumes.
The advantages of static pricing (fixed pricing)
Fixed pricing is consistent. Customers get used to your pricing. Companies that use fixed pricing tend to change their prices annually or bi-annually. This means fixed pricing in turn may not offend as many customers by fluctuating prices over time.
Sales forecasting and profit estimates are also simpler when you know your price point.
The disadvantages of static pricing (fixed pricing)
Static pricing doesn’t allow for adjustments if you get into product or service delivery and the cost-to-serve is eating away at your margins.
It is easy to undercharge a customer (especially for professional services) if additional (unforeseen) work hours has to be completed to get the job done.
There is still a risk of customer switching or feeling ripped off using fixed pricing. Especially when you have set the price floor on your fixed and variable costs. This is because you have a higher chance of overcharging and underselling your offer using a simple cost plus or mark up on cost pricing methodology.
Dynamic pricing advantages and disadvantages
Dynamic pricing as previously discussed in the Hoyt’s dynamic pricing model example, means you can change the price of an item in real time and over time. You can also react to the demand from customers at a very granular level. With the right strategy, pricing structure and revenue management system in place, it is possible to change prices in response to your competitors across micro-segments (i.e., competitor groups).
Dynamic Pricing Advantages
Advanced pricing tools and a dynamic pricing models increase the quality of price decision making. This in turn protects your hard earned volumes and margins.
A dynamic pricing model example helps a pricing team develop reliable elasticity estimates. This in turn allows them to maximise profits with each customer.
An effective dynamic pricing model example is one which gives you the ability to adjust prices for services and products based on time, costs and consumer demand
Another benefit of a dynamic pricing model example is that it gives you the ability to adjust prices for service and products based on the time and costs involved or fluctuating demand. In particular, a dynamic pricing strategy optimises revenue across multiple segments for perishable or time-based products and services.
For example, when sales fall for products with a life span (i.e., perishable goods), effective dynamic pricing model examples enable businesses to quickly lower their prices. When demand increases, conversely, a dynamic pricing model example enables businesses to increase them again as demand increases.
A dynamic pricing model can also help a supplier serve multiple customer segments with a fixed asset. Namely, setting different prices for each segment to optimise revenue and enhance profitability.
Disadvantages of dynamic pricing
Price transparency in the market.
If customers realise they paid higher prices than others for the same solution, they may demand their money back or spread negative messages in the marketplace. (But not always, as the Hoyt’s case example.)
Some customers might not buy from you if they prefer to know the set price up front on a purchase. Segmentation is critical for dynamic pricing to work well.
You need to enable the whole organisation to use sophisticated pricing software and systems. This takes time and money. The results of dynamic pricing take time. Advanced technology programs take at least 18- 5 years to learn to optimise price adjustments across multiple segment (let alone micro-segments) over time.
A key role of the pricing and revenue management team, therefore is to direct the revenue management system. They need to ensure the system is learning properly. They need to understand how customer segments behave, including how the micro-segments within each customer segment behave.
People drive effective pricing decision making. Data, models and process makes decision making more efficient.
Advanced pricing tools are difficult to set up. An effective dynamic pricing model example must be implemented properly and consistently to safely generate more revenue and margin for your business.
It is difficult to integrate a dynamic pricing example in the business. There is a risk that it might not work. Especially if the model is misaligned to broader pricing and product strategies. Which means you can lose customers, volume and revenue when you first set up or roll out a dynamic pricing model example into the market.
The role of the pricing team
To prevent necessary margin leakage when you set up a new dynamic pricing model example, you must get the help of world class pricing.
An effective pricing team always tests assumptions before building dynamic pricing models. This includes; using formal hypothesis testing and value frameworks or models to isolate unique customer demand and value drivers by segment and micro-segment.
Once a pricing team understands how their customer segments behave, they then look for effective ways to balance dynamic pricing and value based price segmentation.
building an effective and flexible price structure with parameters / barriers that prevent the business from pricing below cost or floor price.
Examples of barriers in dynamic pricing models are:
- extra service.
Barriers help pricing teams influence consumer behaviour by ensuring that the segment willing to pay more is not able to pay the lower price.
If you want a pricing strategy to beat the odds, you’ll need to seriously consider a dynamic pricing model example for your business.
A technical dynamic pricing definition would be a dynamic pricing model example which updates prices frequently based on changing supply or demand characteristics to balance throughput and capacity utilisation.
Some pretty common B2C dynamic pricing model examples, include: Easy Jet dynamic pricing and Qantas dynamic pricing.
A more recent and unexpected dynamic pricing model example is Hoyts (owned by the Wanda Group) who introduced a dynamic pricing model in Australia.
The main difference between a static pricing and dynamic pricing is static pricing gives customers a single price. Whereas dynamic pricing model example changes the price of an item in real time and over time. And, reacts to the demand from customers at a very granular level.
Given the importance and complexity of pricing decisions, you would think that companies are keen to invest heavily in the pricing function. Dynamically pricing requires you get a world class pricing team on board. They need the skills and expertise to prepare the price data architecture and analytics to run a dynamic pricing model example.
However, our research indicates that 7 out of 10 pricing teams are still struggling to monetise the differential value generated within each served segment. Mainly due to: lack of sponsorship or leaving pricing strategy discussions to end of the year.
The 3 out of 10 pricing teams that do successfully implement a dynamic pricing model example, conversely, consistently generate more revenue and margin. Our research shows that pricing teams that have developed and implemented effective dynamic pricing model examples tend to be better at monitoring their changing markets than pricing teams using static pricing and cost-based pricing structures. But these teams are almost always supported by the business.
Pricing has to be seen as a crucial pillar for long term profitable growth
Advanced pricing tools and models facilitate more informed, efficient and profitable pricing decisions.
Pricing expertise drives effective pricing decision making. Data, models and process makes team decision making more efficient. You still need a world class pricing function and sales team to inform strategy and segmentation even if you have invested in new pricing tools and systems.
If you would like to learn more about how to build a world-class pricing team to implement dynamic pricing successfully in your business, download our complimentary e-book five ways to double EBIT or free pricing recruitment guides.
Don’t waste another dollar on the wrong pricing team strategy.
Arrange a confidential meeting.
Did you know that…
How you set up and recruit strategic pricing managers and analysts is a key determinant of how fast you can accelerate earnings growth. With the right pricing team strategy and implementation in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6-12 months, the team is often able to find additional earnings. They identify more complex and previously unrealised revenue and margin opportunities.