Dynamic pricing is the process of changing prices in real time in response to data. This is typically done by automation such as business rules, algorithms or artificial intelligence. Human judgement may also be involved. The following are common types of dynamic pricing.
Setting prices at a finely grained level based on data related to competition, demand and inventory levels. For example, airlines may set prices at the seat level and use a variety of sales channels and policies to optimize revenue using data such as demand forecasts.
Supply & DemandEstimating supply and demand in real time to set prices. In some cases, this can be unpopular with customers or be prohibited by law. For example, raising prices during a natural disaster is typically considered price gouging.
Dynamic pricing may be used to manage cities to improve quality of life or the environment. For example, tolls for emitting air pollution that go up when air quality drops.
CompetitionAdjusting prices in response to competition in real time. Common in highly competitive market places long before automation existed.
InventoryAdjusting prices in response to low or high inventory levels. Common in industries where inventory occurs at a point in time such as an airline seat or a hotel room.
Price SensitivityAlgorithms that detect price sensitivities in real time. This requires careful attention to laws, regulations, business ethics, reputational issues and customer experience. Generally speaking, customers want pricing to be equitable, transparent and predictable.
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