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What is value based pricing?

What is dynamic pricing?

Dynamic pricing is often used as a buzzword. What it really is:  the capability for your prices ( process & system) to vary overtime rapidly or not and according to certain triggers/ or  criteria’s that you have defined. A false perception but that is quite understandable is that dynamic pricing means that you have pricing changing in real time each minute each hour 24/7. That perception has been driven by airline & hotel industries that have used dynamic pricing well and quite for some years. Now the dynamic pricing such as the one for airline business is basically revenue management which is a pricing strategy used by companies with high fixed capacity & very strong dynamic component . This is commonly accepted on the retail level by each consumer looking at the latest price of their flying tickets or their hotel rooms compared to the day ,  hours before. It is widely accepted that it changes very often even with big spreads. In most industries dynamic pricing is implemented with price changes that far less erratic than the ones observed in airlines.

How can you use dynamic pricing?

One of the smart ways to use dynamic pricing is to set the rhythms of the price variation as they are required . Simply:  what are the criteria’s that for you enables or require a price change ? Is it one of your cost components that is extremely volatile and that you wish to reflect directly ? Or is it to certain customers segments or it is driven partially or exclusively due to the value that the customer sees in your product that can vary also very quickly or depending of the time of  day ? These triggers/ criteria are something that can be different for each company’s operating even with dynamic pricing so the first thing is to ask yourself and to basically analyze in depth what are the opportunities today that you have that will enable you to change prices and what would be the result in terms of top line or in terms of bottom line for your company . It is also important to educate your customers and your business environment what what dynamic pricing is &  what does it mean for them. If you are evolving into a B2B environment and you are supplying business counterparts that will resell also your product it is not necessarily a bad thing for them because it means that as your prices move along, they are being put in better position sell better at the right price level to their customers.

What place you could give to it

Depending on how you wish to execute the dynamic pricing whether it is a competition based pricing,  whether you have a value based pricing and you’re adding a dynamic component to it. You can have for instance have a value based dynamic pricing strategy, it all depends on your own context ,  company , market in which you are evolving in your customers and also your ability to execute these price changes.  It is important to not overlook the system aspect of it because once you change the price you need to have the ability to communicate it through all the different intermediaries that need potentially to be aware of your prices at all times. These are questions that you answer during your pricing diagnostic.

The impact of dynamic pricing

The impact can be huge the more price changes you have the more accurate and relevant and coherent criteria’s that you are choosing to trigger the price variation,  the more you put yourself in the right position,  to get the right opportunities in terms of making more profit and generating more sales. If you know that you have one set of customers consuming your product between 8:00 to 12:00 with a willingness to pay of 1 then between 12:00 to 18h00 another sets of customers with a willingness to pay of 3  , you two different segments, willingness to pay. Now you need the ability to execute these two different prices during these times to  maximize both your revenue and profit.

Indirect benefits

indirect benefits just with like value based pricing that we talked about before implementing dynamic pricing will make you ask the right questions that you can find sometimes answers very quickly too but you just create the right space to ask questions and to answer them and make a very thorough I would say analysis of what your market is composed of what do your customer value how are the different segments that you are serving or that you can serve or that you’re under serving today value your product and what is the difference in between these this customer segments do they value the same services and products we have a totally different product mix depending on the time these are all questions that you will get answer to quite organically in the process of implementing dynamic pricing.

 

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