PRICING

STRATEGY

By

Teacher’s Name: Ann Jhea Mae L. Lamarca

 CHAPTER 1. INTRODUCTION TO PRICING STRATEGY AND DIFFERENT PRICING
STRATEGIES
Definition: Price is the value that is put on a product or service and is the result of a complex set of calculations, research and
understanding, and risk-taking ability. A pricing strategy takes into account segments, ability to pay, market conditions,
competitor actions, trade margins, and input costs, amongst others. It is targeted at the defined customers and against
competitors.
A business can use a variety of pricing strategies when selling a product or service. To determine the most effective pricing
strategy for a company, senior executives need to first identify the company's pricing position, pricing segment, pricing
capability, and competitive pricing reaction strategy. Pricing strategies and tactics vary from company to company, and also
differ across countries, cultures, industries, and over time, with the maturing of industries and markets and changes in wider
economic conditions.
Pricing strategies determine the price companies set for their products. The price can be set to maximize profitability for each
unit sold or from the market overall. It can also be used to defend an existing market from new entrants, to increase market
share within a market, or to enter a new market. Pricing strategies can bring both competitive advantages and disadvantages to
a firm and often dictate the success or failure of a business; thus, it is crucial to choose the right strategy.
Pricing objectives
Firms rely on price to cover the cost of production, to pay expenses, and to provide the profit incentive necessary to continue
to operate the business. We might think of these factors as helping organizations to: (a) survive, (b) earn a profit, (c) generate
sales, (d) secure an adequate share of the market, and (e) gain an appropriate image
• Survival: It is apparent that most managers wish to pursue strategies that enable their organizations to continue in
operation for the long term. So survival is one major objective pursued by most executives. For a commercial firm,
the price paid by the buyer generates the firm’s revenue. If revenue falls below cost for a long period, the firm cannot
survive.
• Profit: Survival is closely linked to profitability. All business enterprises must earn a long-term profit. For many
businesses, long-term profitability also allows the business to satisfy its most important constituents stockholders.
Lower than expected or no profits will drive down stock prices and may prove disastrous for the company.
• Sales: Just as survival requires a long-term profit for a business enterprise, profit requires sales. As you will recall
from earlier in the text, the task of marketing management relates to managing demand. The demand must be
managed to regulate exchanges or sales. Thus marketing management aims to alter sales patterns in some desirable
way.
• Market share: The management of all firms, large and small, is concerned with maintaining an adequate share of
the market so that their sales volume will enable the firm to survive and prosper. Again, pricing strategy is one of the
tools that is significant in creating and sustaining market share. Prices must be set to attract the appropriate market
segment in significant numbers.
• Image: Price policies play an important role in affecting a firm’s position of respect and esteem in its community.
Price is a highly visible communicator. It must convey the message to the community that the firm offers good value,
that it is fair in its dealings with the public, that it is a reliable place to patronize, and that it stands behind its products
and services.

TYPES OF PRICING STRATEGY

1. Cost-plus pricing

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Many businesspeople and consumers think that cost-plus pricing, or mark-up pricing, is the only way to price. This strategy
brings together all the contributing costs for the unit to be sold, with a fixed percentage added to the subtotal.
The most common strategy used involves adding a markup on the product costs. Many companies compute the cost of
producing a product and add a specific margin.
Formula:
Markup = Selling Price – Cost or Expenses per product
2. Competitive pricing
“If I’m selling a product that’s similar to others, like peanut butter or shampoo,” says Dolansky, “part of my job is making
sure I know what the competitors are doing, price wise, and making any necessary adjustments. That’s a competitive pricing
strategy in a nutshell.
You can take one of three approaches with competitive pricing strategy:
Co-operative pricing
In cooperative pricing, you match what your competitor is doing. A competitor’s one dollar increase leads you to hike your
price by a dollar. Their two-dollar price cut leads to the same on your part. By doing this, you’re maintaining the status quo.
Co-operative pricing is similar to the way gas stations price their products for example.
The weakness with this approach, Dolansky says, “is that it leaves you vulnerable to not making optimal decisions for yourself
because you’re too focused on what others are doing.”
Aggressive pricing
“In an aggressive stance, you’re saying ‘If you raise your price, I’ll keep mine the same,’” says Dolansky. “And if you lower
your price, I’m going to lower mine by more. You’re trying to increase the distance between you and your competitor. You’re
saying that whatever the other one does, they better not mess with your prices or it will get a whole lot worse for them.”
This approach is not for everybody. A business that’s pricing aggressively needs to be flying above the competition, with
healthy margins it can cut into. The most likely trend for this strategy is a progressive lowering of prices. But if sales volume
dips, the company risks running into financial trouble.
Dismissive pricing
If you lead your market and are selling a premium product or service, a dismissive pricing approach may be an option.
In such an approach, you price as you wish and do not react to what your competitors are doing. Ignoring them can increase
the size of the protective moat around your market leadership.
Is this approach sustainable? It is, if you’re confident that you understand your customer well, that your pricing reflects the
value and that the information on which you base these beliefs is sound.
On the flip side, this confidence may be misplaced, which is dismissive pricing’s Achilles’ heel. By ignoring competitors, you
may be vulnerable to surprises in the market.
3. Price skimming
Companies use price skimming when they are introducing innovative new products that have no competition. They charge a
high price at first, then lower it over time.
Think of televisions. A manufacturer that launches a new type of television can set a high price to tap into a market of tech
enthusiasts. The high price helps the business recoup some of its development costs.

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Then, as the early-adopter market becomes saturated and sales dip, the manufacturer lowers the price to reach a more price-
sensitive segment of the market. Dolansky says the manufacturer is “betting that the product will be desired in the marketplace
long enough for the business to execute its skimming strategy.” This bet may or may not pay off.

Risks of price skimming

Over time, the manufacturer risks the entry of copycat products introduced at a lower price. These competitors can rob all
sales potential of the tail-end of the skimming strategy.
There is another earlier risk, at the product launch. It’s there that the manufacturer needs to demonstrate the value of the high-
priced “hot new thing” to early adopters. That kind of success is not a given.
If your business markets a follow-up product to the television, you may not be able to capitalize on a skimming strategy.
That’s because the innovative manufacturer has already tapped the sales potential of the early adopters.
4. Penetration pricing
“Penetration pricing makes sense when you’re setting a low price early on to quickly build a large customer base,” says
Dolansky.
For example, in a market with numerous similar products and customers sensitive to price, a significantly lower price can
make your product stand out. You can motivate customers to switch brands and build demand for your product. As a result,
that increase in sales volume may bring economies of scale and reduce your unit cost.
A company may instead decide to use penetration pricing to establish a technology standard. Some video console makers
(e.g., Nintendo, PlayStation, and Xbox) took this approach, offering low prices for their machines, Dolansky says, “because
most of the money they made was not from the console but from the games.”
The risks of penetration pricing
• Your customers may expect constant low prices.
• Price-sensitive customers can be disloyal.
• A price war with your competitors may ensue.
5. Value-based pricing
In value-based pricing, the perceived value to the customer is primarily based on how well it’s suited to the needs and wants of
each customer.
Dolansky says a company applying value-based pricing can gain an advantage over its competitors in a couple of ways:
•The price is a better fit with the customer’s perspective.
•The pricing brings more profit, allowing you to acquire more resources and grow your business.
When a price doesn’t work, the answer isn’t just to lower it, but to determine how it can better match customer value. That
may mean altering the product to better suit the market.
In an ideal world, all entrepreneurs would use value-based pricing, Dolansky says. However, entrepreneurs who sell a
commodity-like service or product, such as warehousing or plain white t-shirts, are more likely to compete on low costs and
low prices.
For entrepreneurs offering products that stand out in the market—for example, artisanal goods, high-tech products, or unique
services—value-based pricing will help better convey the uniqueness they’re offering.
How do you set a value-based price? Dolansky provides the following advice for entrepreneurs who want to determine a
value-based price.

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 ✓ Pick a product that is comparable to yours and find out what the customer pays for it.
✓ Find ways that your product is different from the comparable product.
✓ Place a financial value on these differences, add everything positive about your product, and subtract any
negatives.
✓ Make sure the value to the customer is higher than your costs.
✓ Justify the price to customers, which might include reaching out to them.
✓ For an established market, its current price range will help educate you on customers’ price expectations.

PRICING STRATEGY PROS CONS

Cost-plus pricing A time-saving way to price Does not incorporate the value to the
customer

Competitive Simple: adjusts to Lower prices can bring financial trouble if

sales volume dips.
pricing competitors’ prices
Ignoring competitors may leave you
Aggressive pricing: good for companies
with healthy vulnerable to surprises in the market.
margins
Dismissive pricing: offers market
leadership protection

Price skimming Its early high prices help recoup Copycat products can rob later-stage sales
development costs.
potential.

Penetration pricing Its significantly lower price can motivate Price wars and too-low prices can become
customers to switch brands the norm.

Value-based A boon to artisanal goods, high-tech Not beneficial for all products where
products, and other unique services.
pricing differentiation is not a key variable.

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 CHAPTER 2: ANALYSIS OF PRICING STRUCTURES, AND SETTING PRICING POLICY
PRICING STRUCTURE
A pricing structure defines and organizes prices for your company’s products and services. The objective is to charge a rate
that aligns with your pricing strategy while balancing profits with what the market will bear to avoid over- or under-charging
customers.
A pricing structure prices products and services so that they make sense to customers and get them to buy. For instance, you
might offer a discount when customers buy more than one product.
Building a Pricing Structure:
1. Business Objectives Outlining the business objectives that align with the vision and mission of the company is important.
This will give an overall direction that is to be followed to achieve and that will help you determine the profits required which
in turn will determine the pricing of the product.
2. Market Research Conduct thorough market research to understand the market and industry. There could be competitors
working on low or possibly lowest cost and there could be competitors based on quality. To understand the market clearly, a
detailed analysis of the pricing of other products is required.
3. Know thy Customers The nature of the customer, likes and dislikes and the seasonal variations that affect a business are to
be understood. The most important of all is if the customers are having any difficulties with the current offerings in the market
and how can our product answer those difficulties.
4. Demand-Supply Relation Application of the Law of Supply and Demand 5. Know thy Competitors Knowing the
nature of the offerings by competitors and if their pricing justifies it is also of crucial importance. Knowing the pricing
structure of competitors helps to price the product accordingly.
6. Creation and execution of pricing structure Final step wherein the company will decide which pricing structure to go
ahead with. It has to make its decision based on the above factors.
MANAGING CUSTOMER PRICING EXPECTATION
Why it is Important to Know Customer Expectations?
1. Understand customer expectations – in your product, in the beginning, it’s important to know it upfront to know our target.
2. Understand Expectations – not just your expectations but also your team’s expectations to be fulfilled. This should be kept
in a file so the team would know your focus area.
3. Set Expectations Properly – Your customers sometimes have perceptions about your product or company that are not
accurate, so it is important to know their expectations so you can able to align those expectations properly.
4. Insights into the Particular Needs of the Customer – sometimes we think that our customers may like that thing but it
turns out that they like other things plus on couple of things that are never discussed so it’s a good thing specially to increase
the up sales of the company.
5. Insight into Additional Products and Services – that you can provide, these are certain things that you don’t do but you
can do. It helps you to better lay should strategies about your sales profit and process, this will increase your experience as
well as your revenue from product add-ons.
6. Gives you Insight on How to wow – The key is not just to meet the expectations but to exceed them so we need to listen
between the lines and think about not only how to deliver to them exactly what they want but maybe one layer more, so that
they will enjoy the experience, stay longer and spend more, even refer your product or company. And that is the key to
success.

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How to Meet the Customer Expectations
1. Be Super Proactive – If anything that would not meet your customer's expectations, you have to communicate that
instantly to the customer. If the deadlines have to pause back call right away, and talk about it right away. Or anything issues
or changes on your product or services communicate them right away.
2. Listen to your Customer Issues – Let them talk and finish everything that they want to say. Make sure that you listen
carefully and understand what they are saying so you can present the solution for them and strategy on that point. Clarify the
problem and let them know that you understand their problem, and now that you are delivering your strategy you will move
them from a critical moment to a comforting moment.
3. Follow up – make sure that you follow up after you come up with an action plan, such as a gift card or handwritten note.
This will bring back the confidence of
your customers in your brand.
4. Ask for Help – If you have a situation that you need help on don’t deal it with yourself ask for help from your teammates or
other research. Maybe this is something that they want but you don’t do that comes out along the way, you may ask for help
from those people with knowledge and experience on those things. You have to go outside the service box to provide the
solution to the problems for your customers.
5. Understanding of these Pivot Points – there are these critical moments when you see problems and issues, maybe weeks
after you do your business, you will typically meet these concerns. Think about these difficult moments that might potentially
arise in your process, or have a ready-made solutions to any problems that you might encounter along the way.
COMMUNICATING PRICE INCREASE
Ways to Communicate Price Increase
Step 1: Start Addressing the Issue Informally First – Tell or let your customer know about your price increase before the
formal announcement. In this way, your customer would not be surprised with your price increase and there would be better
communication of the reason for your price increase. Directly tell your customer the reason “WHY” you will have a price
increase.
2. Step 2: Create Supporting Documentation – Create supporting documents or materials, every time you make a
communication with your customers it is documented so that if the customer complains you have documents to come back.
Also, make a documentation of the frequently asked questions or objections, this would make you prepared with the proper
answers to those questions.
3. Step 3: Role Play – If the company hasn’t done a price increase for a long time, practice how it will be communicated with
their customer. If necessary, grab everyone in the organization, especially the salesman who has direct contact with the
customers.
4. Step 4: Don’t Back Down – If you tell the whole world about your price increase then go on will your price increase. Your
customers will always do things to push you back but always stick with your price increase.

CHAPTER 3: PRICING AND STRATEGY IMPLEMENTATION WITHIN THE FIRM

Different Inputs to Pricing Strategy
• Legal Concern
For some products, the government will set firm price controls (price ceilings, or price floors)
To ensure ethical and/or accessible pricing for a given population.
• Value–Added Pricing - the difference between the price of a product or service and the cost of producing it.

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✓ Functional Value – This is a typical example of demand, where the product is valued at how well it accomplishes a
function.
✓ Monetary Pricing – where the cost of resources and production correlate cleanly with the price.
✓ Social Value – This is to say that some products provide intangible value to users. The quantification of the relative
importance that people place on the changes they experience in their lives.
✓ Psychological Value – Some items have value to an individual for personal reasons. The degree or intensity with which we
desire to realize, maintain, or protect the object or idea.
• Competitive Positioning – the basic premise of differentiation to achieve higher value. • Discounting
Struggles to Implement and Maintain Pricing Strategies

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CHAPTER 4: COMPETITION-BASED PRICING
 Competition-based pricing is a pricing method that involves setting your prices in relation to the prices of your
competitors. This is compared to other strategies like value-based pricing or cost-plus pricing, where prices are
determined by analyzing other factors like consumer demand or the cost of production.
 Competition-based pricing focuses solely on the public information about competitor’s prices, not customer value
HOW TO BUILD A COMPETITOR-BASED PRICING STRATEGY

Identify the competitors in your market

The first step to competitor-based pricing is to figure out who your competitors are. Which companies are selling similar
products or services? This is fairly standard market research you should be performing already.
Then, group them by specific characteristics, such as tenure and market share. Pick out the companies that most closely match
your own brand’s profile these are your top competitors.

Research their pricing and positioning strategies

Once you know the competitors that make up your market, perform a competitive pricing analysis to dig into their pricing
models and positioning strategies to build a map of current trends. Make sure to look at not only their pricing but also the way
it’s packaged, the types of tiers they use, and the features they differentiate on. This research will help you understand what
types of pricing and positioning customers expect in the market, so you can choose the best price for your product or service.

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Average the price of
all competitors
Creating a pricing
map will
help you
understand what all
of your different
competitors are doing
individually, but it’s
also important to look at
all of this pricing
data in aggregate
as well.

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To get the latter view, calculate the average price of your product type across competitors. Knowing this average, you’ll have a
benchmark price to compare your own product’s rates to.

Choose higher, lower, or matched prices

After researching competitors’ pricing, you’re ready to determine where your product or service fits into the market.
 Higher-than-average price: When you want the premium price to signal luxury to potential customers
 Lower-than-average price: When you’re trying to undercut the competition with a low price and acquire customers
quickly
 Matched price: When your pricing strategy will be in line with your competitors
Whether you’re just entering the market or working to solidify your current standing, the price you choose will inform you of
the customers' perceived value of your brand. Just remember that competitor-based pricing, like most simple pricing
methodologies, doesn’t optimize your company for growth.
Competition-based pricing Advantages and Disadvantages
ADVANTAGES
 Competition-based pricing is a great first step in finding the best possible selling price for your product or service.
Market research gives you a solid base on which to make your pricing decisions. One that’s easy to calculate, quick
to implement, and relatively low risk.
 Easy to Implement - Competition-based pricing is easy to calculate and understand. All you have to do is look at the
competitors in your market and find the average price they use for their services. From there, you can choose whether
to go with a lower or higher price or align with customers’ expectations.
 Low Risk - When you set pricing close to competitors’ rates, you don’t have to worry about surprising customers
with your price point. You’ll already know that it’s close to what they expect to pay to your competitors. By staying
close to the average market price, there’s a good chance customers will be happy to pay your prices.
 Evolves with the Market - With competition-based pricing, adjusting your pricing doesn’t involve guesswork—you
just have to align it with the market. If you see several competitors suddenly resorting to certain price changes and are
going with higher or lower prices, do the same to your rates.

DISADVANTAGES
 While competition-based pricing is simple to execute, it limits your ability to connect the value your service provides
with the price it demands. Lacking that connection can set you up for pricing issues in the future.
 Disconnected from Demand - Competition-based pricing looks only at what other companies are doing in the
market. It doesn’t look at the consumer demand for a product or service, meaning it’s very easy to leave money on
the table. Increased demand for your products won’t be directly reflected in your competitors’ prices.
 Limits Flexibility - Because you’re looking only at how competitors price their product or service, you’re limiting
yourself to their knowledge and practice. This means you might not be factoring in other important pricing
considerations, like willingness to pay, cost of production, or feature differentiation.
 Ignores Customers - Competition-based pricing doesn’t consider how customers react to your pricing strategy.
Instead, it just focuses on what other companies and market leaders are doing. By leaving customers out of the
equation, it’s tough to anticipate how shopping behavior might impact your pricing in the long term. Ultimately, it
might take a toll on your profit margin.

Three types of competitive pricing

High price When you set the prices higher than your competitors

Matched price When you align your prices with your competitors
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Low price When you set the prices lower than your competitors
 The three main competition-based pricing strategies include:

By employing a penetration pricing strategy, you

Penetration are setting your prices lower to penetrate the
pricing market by attracting price-sensitive customers
who are looking for better deals.

Setting limited, promotional deals helps you

double the sales, but know that the final profit
Promotional will be lower than if you kept the original
pricing product prices.

This strategy requires you to group some of your

Captive pr accessory products along with your core product
icing and sell them as a bundle, that way attracting a
Competitive analysis frameworks larger customer volume.
What is a Competitive Analysis
Framework?
A competitive analysis framework is a model you can use to help shape how you go about researching your competitors. It
helps you home in on specific information by giving a structure to guide your market analysis.
1. SWOT Analysis
The SWOT framework helps you evaluate the internal (Strengths and Weaknesses) and external factors (Opportunities and
Threats) that impact your business or a course of action.

When to Use a SWOT Analysis?

SWOT analysis is often used in strategic planning to help identify a potential competitive advantage. For example, your strong
relationships with suppliers might allow you to offer prices that are lower than your competitors. But you can also apply it in

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much narrower situations. You can use it to evaluate a decision by looking at your strengths, weaknesses, opportunities, and
threats relative to the decision.

2. Porter’s Five Forces

Porter’s Five Forces is a framework that examines the competitive market forces in an industry or segment. It helps you
evaluate an industry or market according to five elements: new entrants, buyers, suppliers, substitutes, and competitive rivalry.
According to Michael Porter’s model, these are the key forces that directly affect how much competition a business faces in an
industry.

When to Use Porter’s Five Forces?

This framework is useful when you want to analyze the competitive structure of an industry. Looking at the five forces can
provide insights into how attractive it is to enter a new market, for example. This is helpful if you are considering whether you
should expand your product offering to reach new customers.
Competitor analysis using Porter’s Five Forces can also provide insights to help you shape your strategy to the competitive
landscape of your industry. For instance, if the threat of substitutes is high, you may seek to mitigate that competitive force
with a strategy focused on building brand affinity among your customers.

3. Strategic Group Analysis

Strategic Group Analysis is a competitive analysis framework that lets you analyze organizations in clusters based on the
similarity of strategy. By identifying the cluster your firm falls into for any given strategic dimension, you can get a sense of
the impact of the different strategic approaches. You can also see those you are most closely competing with.
When to Use Strategic Group Analysis?

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This framework is particularly useful when you have a hypothesis about the effect of a business dimension. For example, you
can create strategic groups according to digital marketing tactics and analyze the performance of the groups to explore
potential causality. How do competitors who rely heavily on paid search campaigns fare when it comes to share of voice?
Which of your competitors fall into the same cluster as your firm when it comes to their pricing strategy?
By exploring different dimensions, you can surface key factors for success and evaluate your position relative to others in the
industry.

4. Growth Share Matrix

The Growth Share Matrix is an analysis framework that classifies the products in your company’s portfolio against the
competitive landscape of your industry. Developed by the founder of the Boston Consulting Group (BCG) in 1970, the model

gained widespread acceptance for helping companies decide which products to invest in based on competitiveness and market
attractiveness.
According to BCG, products fall into one of four quadrants in the matrix, each with a corresponding strategy:
1. Question marks are high-growth but low-market-share products, often new products with high potential. These
should be invested in or let go, depending on how likely a product is to become a star.
2. Stars are products that are likely to achieve high growth and high market share. Your firm should invest heavily in
these products.
3. Cash cows are low-growth but high-share products. These are products that bring in cash and can fund investment in
your stars.
4. Pets are low-share, low-growth products considered failures. Your business should reposition these products or stop
investing in them.

When to Use the Growth Share Matrix?

The traditional use of this competitive analysis framework is to help large firms determine their product portfolios which
products to invest in further and which to cut, based on expected cash flow produced.

5. Perceptual Mapping
Perceptual mapping is a visual representation of perceptions of your product relative to competing alternatives. It’s also called
positioning mapping because it shows the position of your brand, product, or service mapped against that of your competitors.

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The first step is to determine two attributes you’ll use as the basis for comparison. Next, you plot where your product and
those of your competitors fall on the spectrum of those two attributes.

When to Use Perceptual Mapping?

Perceptual mapping is useful for understanding how your customers perceive your product offering about your competitors.
Market researchers use perceptual mapping to show the results of customer input they have collected. As a marketer, you will
find mapping useful when you want to understand how customers view you and your competitors. This will help you
understand whether your existing positioning strategy is registering with your target audience. It can also provide insight into
gaps to target.

CHAPTER 6: DYNAMIC PRICING

What is Dynamic Pricing?
Dynamic pricing is the concept of selling the same product at different prices based on the changing dynamics of the current
market demand. This is why it is also called real-time pricing, surge pricing, or time-based pricing.
The decision-making process behind the dynamic pricing model is quite impressive. Under the hood, machine-learning robots
are working for you to develop new algorithmic models based on the market demands and your competitors' actions. This
data-driven process allows companies to adjust the prices of their goods continuously within seconds.
A dynamic pricing strategy is popular among many business models. But the first companies that spring to mind are the airline
industry, eCommerce businesses, public transportation, retail, and entertainment. Since each of these industries has different
mechanics, they use different types of dynamic pricing models.
FIVE TYPES OF DYNAMIC PRICING
Segmented pricing

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The perceived value of a product can be flexible for different segments. This is why segmented pricing offers different prices
(two or more) for identical products. One could also see it as psychological pricing. Segmented pricing is also called "price
discrimination". This term doesn't feel fair at first glance, but high-value segments often demand top service and quality. So
the price is an equalizer.
Time-based Pricing
This pricing strategy involves a broad spectrum of use cases. It's popular in industries where the demand for the product or
service changes throughout the day. Or where businesses want to offer incentives to trigger purchases for different reasons.
Example: Transportation businesses often benefit significantly from different tariffs. E.G night tariffs for taxis.
Changing market conditions
Market conditions can change due to numerous reasons. Recently, in the pandemic era, we witnessed how simple products
such as toilet paper, sanitizers, and mouth masks were sold for 500% profit. Remember, a convenience store sold a single
toilet paper at $10 with a sign reading: "This is not a joke." The reverse can also happen, for some reason, demand can
decrease which will force companies to lower their prices.
Peak pricing
This pricing strategy benefits from high demand at certain times of the year. If you ever rented a place via Airbnb, you already
know what it means. The price of apartments goes up in certain months (especially during holidays). The same goes if you
want to buy the last airplane ticket to Bali during the holiday season.
Penetration pricing
The penetration pricing model is often used when a new business enters the market, or an existing business wants to dominate
the market. Companies do that by offering lower prices compared to their competitors. Of course, the prices won't remain low
for a long time. After businesses reach a certain amount of customer base and demand, they gradually increase prices.

Dynamic Pricing Advantages

Many businesses are leveraging the power of dynamic pricing strategies because they can increase their market share, benefit
from seasons, and develop psychological pricing strategies to increase their revenue. There are more upsides to using a
dynamic pricing model but as you know those upsides you will notice that often have a downside.

Bird-eye View of the Market

Know your customers. This is the foundational building block of a great dynamic pricing strategy. In doing dynamic pricing, it
requires the business to see what’s going on in the market. Who are their customers? Who are their competitors? What are
their prices? What are their pricing strategies? How often do they pivot their strategies? By doing this, you are shaping your
dynamic pricing strategy and finding out the trends and patterns in your industry.

Get to know your customers better

As you implement your dynamic pricing model, you'll start to measure and track your customers' behavior. Thru this, you will
be given an overview on:
• Frequency and timing of the purchases.
• The minimum and the maximum price that your customers are willing to pay.
• A detailed overview of the demand curve.

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Revenue growth
By fueling your dynamic pricing machine with each insight, you'll have a better understanding of your customers' shopping
patterns, preferences, and limits. Eventually, this will guide you through creating a better and more accurate pricing strategy.
Aside from that, you'll have an almost unfair advantage against your competitors. You'll always know about their pricing and
set a specific set of rules to adjust your price based on your strategy. This alone can give you market domination in the long
run.
DISADVANTAGES OF DYNAMIC PRICING
Customer alienation
People hate when they realize that someone else paid half price for the identical item they bought. Simply, they feel like
they've been ripped off. So there is a risk of losing your loyal customers and their circle of influence. But hey, you can set
some preventive limits to the maximum amount of fluctuation to keep things accountable.
This leads a price war in the market
Even loyal customers don't stand a chance against aggressively low price offers. Remember I mentioned Uber eats 50%
discount above, even though we eat homemade food 99% of the time, we ordered because it was simply too powerful. So
powerful that it could change the behavior of a person. Naturally, if a business can compensate for low prices and provide
powerful offers, one way or another, it'll increase its market share. But what if the competitors up the ante? Then, it's a war,
and many companies die on the battlefield every year. So, think twice when you're setting the rules of the game.
Some popular examples of dynamic pricing
 eCommerce: Many businesses adjust their prices automatically based on competitors, market price, seasons, and
internal marketing efforts (new collections, outlet seasons, etc..).
 Events: dynamic pricing helps the event industry generate more revenue by using the levers of urgency and scarcity.
Cheaper early bird or more expensive last-chance tickets are great examples.
 BnB and hotel Industry: as we mentioned before, here prices are correlated with seasons and certain times of the year
such as holidays, special days, or events.
 Ride-hailing services: Snowy, rainy, during rush hour, or the storm, riding services use dynamic pricing (surge
pricing) to benefit from the environmental conditions.
 Airline pricing: regulars can organize their flights 5 months in advance. But business people often need to reserve
flights at the last minute. Therefore ticket prices change in a matter of minutes with time-based pricing strategies.
 Google ads: the price of ads (keywords) is determined by the market's current supply and demand rate. Say you want
to target the keyword "gift ideas" in the Christmas season, you can pay a lot more than a typical day.

How to implement dynamic pricing in your organization?

#1 Defining a commercial objective
We start with some foundational questions: why does your company exist? What customers can expect from your business?
What do you want to bring to the market? Do you want to be the fastest or most friendly, or the cheapest? Your objective will
be your compass for your business and help you build a strategy to hit your goals.
#2 Building a pricing strategy
In this step, we'll determine your pricing strategy based on your commercial objective. If your objective is to increase your
visibility and dominate the market, you might want to set competitive prices on the most popular products. Then, once they
purchase, you can redirect your customers to less popular products. This stage is tailored for your needs, so it's hard to give
general advice on this one
#3 Choosing pricing methods

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We already mentioned some of the methods earlier in this article. But there are dozens of methods to choose from. The most
common are Competitor-based pricing: you adjust your prices based on the competition. Value-based pricing: taking into
consideration the customer perception of the product. Cost-plus pricing: production costs of the product + the margin you
want. You can pick one of three models at the same time. It depends on your objectives.

#4 Setting some pricing rules

Dynamic pricing tools need your input to make efficient decisions. Usually, there are two steps: you choose the products and
formulate the pricing rule. Example for selecting the products based on data: For spring collection sweaters with a stock < 5,
apply pricing X. Formulation example: X=follow lowest price of competitors A and B.
#5 Implement, test, and monitor
Now you have everything from 1-4. All you have to do is to test and validate your strategy. See whether the rules are working
properly. Since it's going to be an automated system, all things should work like a clock (of course, you can configure it
anytime you want, but that's not the point). After a while, monitor and evaluate your results to see if you're hitting your
objectives. So you can recreate and iterate your strategy to reach a better place. These are the steps and map of progression in a
nutshell!

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