Dynamic Pricing, the Winning Pricing Strategy

Dynamic Pricing, the Winning Pricing Strategy

Dynamic pricing is a pricing strategy where prices are being adjusted according to supply and demand in order to maximize profits. The first sophisticated dynamic pricing algorithm had been developed by American Airlines back in the 1980s. Nowadays, dynamic pricing is increasingly catching on in public and private sectors, and this is no wonder considering how profound an effect setting the prices right have on revenue. According to McKinsey, 1% increase in prices results in an average profit increase of 7.4% provided that the volumes stay the same. Cinema and theater operators are somewhat lagging behind the trend, but DynamO is here to change the status quo and offer competitive advantage to its customers with its advanced pricing solutions.

Dynamic pricing enables businesses to generate more revenue by harvesting a larger part of the customer surplus (i.e. the difference between the price that consumers pay and the price that they are willing to pay). Dynamic pricing strategies work best when two product characteristics co-exist: when the product expires at a point in time, and the capacity is fixed well in advance. This holds true for several sectors and industries, including entertainment, attractions, transportation, stock market, retail, the energy sector, etc. Nonetheless, dynamic pricing started to proliferate into said industries only recently: thanks to the last decades’ advancements in technology – such as improvements in computer power, inventory and demand tracking, computerization of pricing data, and pricing algorithms – the costs and resources of the implementation are not prohibitive as they used to be for most businesses.

Accordingly, an increasingly high number of businesses started to opt for a dynamic pricing strategy: Amazon, Uber, Booking.com, Disneyland, Airbnb, and the Broadway are only a few of the most well-known examples. Pricing, in general, is of major importance for companies: pricing right is the easiest and most effective way for any business to increase profits. As reported by McKinsey, a 1% rise in price would generate an 8 percent increase in operating profits for an average S&P 1500 company if the volumes remained stable — an impact nearly 50 percent greater than that of a 1% fall in variable costs (such as materials and direct labor), and more than 3 times greater than the impact of a 1 percent increase in volume. Additionally, consulting company Accenture suggests that a 1% price increase gives an 11% or greater increase in net operating profit. Dynamic pricing algorithms, if done right, enable businesses to automatically adjust prices according to the demand and, hence, to find the optimal price at any time.

However, dynamic pricing has more advantages to offer, including

  •       Boosted sales
  •       Maximized profits
  •       Greater awareness and overview about the competitor’s prices
  •       Higher levels of demand
  •       Increased customer satisfaction
  •       Demand-reflecting prices
  •       More insights into customer behavior and price elasticity

The approach has its own disadvantages, as it can potentially lead to

  •       Customer alienation
  •       Price war
  •       Reduced sales
  •       Reduced customer loyalty
  •       Customer service overhead

In general, however, dynamic pricing is clearly getting more and more recognition, becoming increasingly widespread, and seems to be the future of pricing. DynamO’s team of experts is happy to advise you on how you can deploy our solutions in your cinema, theater, or other ticketing business to get the most leverage and competitive advantage out of dynamic pricing. Please contact us at info@dynamicpricing.com.


Sources:

Government Technology: Dynamic Pricing Is Catching On in the Public and Private Sectors

R. Preston McAfee and Vera te Velde: Dynamic Pricing in the Airline Industry

McKinsey.com: The Power of Pricing

Michael V. Marn, Eric V. Roegner, and Craig C. Zawada: Dynamic Pricing Advantages and Disadvantages

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