On the simplest end of the spectrum are cost-plus algorithms, which account for the cost to produce an item, then tack on a certain percentage in markup, which can vary. The more factors the algorithm accounts for and the more consistently the algorithm is executed, the more effective dynamic pricing can be. “The test of whether dynamic pricing feels fair comes down to one question: Will the customer understand? ”Ī strong dynamic pricing strategy relies on the power of the algorithm used to generate pricing. Success depends on a dynamic pricing mechanism that provides visible benefits to the consumer and aligns price with value delivered in a consistent and predictable manner. The challenge is to use dynamic pricing in a way that builds customer trust and aligns with consumer perceptions of fairness. Some sellers of building materials have been accused of price gouging after hurricanes, while some sellers of pharmaceuticals have been accused of exerting market power on rare drugs, and many ticket resellers have been accused of scalping. However, there are many examples of companies getting it wrong. By leveraging the power of dynamic pricing, sellers are better able to capture revenues and balance demand against supply capacity. Many energy companies, for example, offer lower electricity rates at night, leading many office buildings to run their climate controls then, so they can preheat or precool offices while electricity costs are low. Even B2B companies-for whom pricing is often more complex and highly customized-are now finding ways to apply dynamic pricing. Amazon reportedly changes its prices millions of times each day, leveraging vast sets of real-time data. Ride-hailing apps, for example, adjust prices based on weather, traffic, and time of day, among other factors.
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