As small Hawaiian businesses work to figure out how to make the most of 2021, the topic of pricing inevitably arises.
Many people we talk to want to know how to set prices. But sometimes, the questions they ask reveal an assumption that “prices shouldn’t change.”
Enter the concept of dynamic pricing. Used often, but frequently misunderstood, this strategy could be the secret sauce to make your business profitable, even in all the uncertainty lingering from 2020.
Dynamic pricing adjusts based on the principles of supply and demand, and rejects the idea that prices have to be static. Static pricing naturally results in more sales when demand is higher. But it fails to adapt when supplies dwindle, and thus sales suffer.
On the other hand, dynamic pricing attempts to create higher demand, or make the most of a lower supply. This strikes a delicate balance between rewarding your customers, or making them feel like they’re being cheated.
Volatility is the main reason dynamic pricing hasn’t made its way into every industry, but some major fields use it to great effect.
The best example is air travel. The price of a flight can vary – it depends on supply, demand, season, or even the day of the week. And customers accept it. Some even treat it like a game, to hunt for the very best deal they can.
Dynamic pricing also cuts both ways. It doesn’t simply raise prices during times of higher demand; it lowers them in times of low demand, to pique interest in your offer. It can sometimes backfire, but it’s still worth considering if the shoe fits.
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Why You Should Incorporate Dynamic Pricing Into Your Local Business
Here are a few reasons to consider dynamic pricing:
- It Balances the Bottom Line
Ultimately, dynamic pricing leads to greater profit. When done correctly and tactfully, it leads to greater revenue during the slower times AND the faster times.
Every business goes through annual or even monthly phases. There are times when your offers are in-demand, and times when they aren’t. Instead of a hit to your bottom line during the off season, use dynamic pricing to drive new interest and demand.
A good example on the mainland is an outdoor recreation store. They don’t sell many snowboards during high summer, especially if they’re priced the same year-round. They could, however, offer a buy-one-get-one half-off deal in the summertime.
They could even turn it into an annual event, “The Christmas In July Super Sale.”
This can bring both new customers and cross-sell opportunities to the ones already shopping. Many department stores do things like this, selling off excess summer wardrobe inventory as people show up to buy cold season attire and holiday gifts.
- Many Businesses Already Benefit From It
One big objection to dynamic pricing is “customers won’t like it.” However, this simply isn’t true. Dynamic pricing isn’t unlikeable in itself… but it can be implemented poorly, and upset customers in the process.
Industries that use this implement it in ways customers tolerate at worst, and celebrate at best. Here are several examples:
- Bars and restaurants host “happy hour.”
- Restaurants charge gratuity for large parties.
- Movie theaters and live entertainment host matinees.
- Entertainment venues charge extra on premier nights.
- Rideshares charge higher fees during peak traffic hours.
If all these businesses benefit from it, then so can you!
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- It Builds Customer Relationships
As I prepared this post, one business owner I work with told me a relevant story.
He said the when visiting the mainland a while back he saw Applebee’s ran a “half-price appetizers with the purchase of one drink” offer after 10pm. Soon, he found himself going to Applebee’s almost daily while there. Then he began inviting friends and building relationships with the servers who worked that day of the week. Even during the pandemic, he went back to the same Applebee’s as soon as it reopened.
This is textbook dynamic pricing. Applebee’s discounts some of their items during a low-traffic period (late evening), and it spikes demand, building customer loyalty.
How To Break Into Dynamic Pricing
Give it a try! Here are some “Do’s and Don’t’s” to get started on the right foot.
DO: Start Small
Don’t go hog wild at first. A scientific experiment fails when you change too many variables. The same goes for prices. Pick a product or service that fluctuates in supply, demand, or both. Then, run a promotion during the low season, or redeploy it with a higher price tag during its next run.
DON’T: Change Too Fast
This goes hand-in-hand with the previous tip. Nobody will like it if you change prices every week. A change in price needs time to run its course, so customers can adjust and you can track results.
When something goes well, you may feel tempted to immediately try it again, or replicate it elsewhere. Instead, take it slow and measure everything. Dynamic pricing didn’t take hold for airlines or rideshares overnight, and it won’t do so for you either.
DON’T: Price Gouge
Sometimes people avoid dynamic pricing because they relate it to price gouging. These aren’t the same thing, however.
Price gouging means raising your prices an unreasonable amount, sometimes doubling or even quadrupling it, when you know there’s a serious demand or a near-monopoly. This is unethical and can be illegal.
Make sure you understand price “ceilings” in your state. Never raise prices because of an emergency. Finally, even if it’s legal where you live, don’t raise your prices by more than 25% without an equal or greater increase in the value of what you deliver.
Do: Lower Prices During a Drop in Demand
Sometimes, you can learn about dynamic pricing and only think of ways to raise prices. However, in most situations you’ll be better off lowering them, especially when you’re new to dynamic pricing.
No customer will get mad at you for offering a promotion or sale, unless they bought the item or service just before the sale started. But suddenly raised prices can lead to suddenly raised temperatures.
If you do it well, lowering prices during low demand can boost your revenue by increasing demand for the discounted offer, and exposing customers to other offers in the process. It also builds goodwill.
If you’d like more help with dynamic pricing, or for marketing your local business, don’t hesitate to give us a call.
Photos by Dan Gold, Federico Persiani, & naipo.de on Unsplash