Types of Pricing Strategies to Address Supply and Demand

I decided to write on this topic because I kept meeting people who needed help with how to set prices, and as a way to engage readers, I promised to make this topic as exciting as possible. While I’m not sure I’ve succeeded in that, I have confirmed that this need is real, and that the whole area of pricing offers upside profit potential for many companies.

This post covers two key Market or Brand Based strategies. I created this segment to address situations where we might undertake a broader marketing strategy such as market build, or a specific brand level challenge like promotion pricing. Decisions made at the market or brand level should be driven more by knowledge and a clear understanding of the external environment.

Time Based Pricing

This strategy strives to maximize efficiencies and/ or profitability by setting price based on supply and demand at the time the product or service is purchased. Many utility companies use time of use pricing to help manage system demand. Here higher electricity rates are established during peak consumption periods, with lower rates applicable off – peak. Time based pricing is also well established within the tourist industry, where a price premium is charged during peak season, and lower rates offered during the off-season.

Dynamic or Flexible Pricing
This approach is similar to time based pricing, in that supply and demand are inherent in the price setting equation. Dynamic pricing can also take into consideration a range of other variables such as changing market characteristics and/ or large amounts of customer data.

One area where dynamic pricing is relevant is in pricing tickets for events. For example, the Washington Wizards modify ticket prices in real time using computer pricing software, with changes based on availability, league standings, roster, day of week, etc.

The airline industry is a well-known example of how pricing has evolved to use large amounts of customer data to customize pricing for identical or similar seats. While capacity and fill rates are important elements in the pricing equation, other factors such as past purchases, requested seats, and home base come into consideration.

Pros and Cons
Both of these pricing methodologies can increase profitability through better, more real-time management of supply and demand. Decision-making becomes more knowledge based as large amounts of data are used to support pricing changes, sometimes without human intervention.

On the downside, customers may be unclear as to what factors actually contributed to their price. They may view this as unfair, which may cause a backlash against the company or the brand. Similarly, these approaches can also be seen as discriminatory since different prices are charged to different individuals or groups for similar products or services.

From the company’s perspective, an investment in advanced software and personnel is required to optimize price adjustments over time. Since technology is being used to ‘mine’ personal data such as purchase history and demographics, some ethical issues may exist.

Summary
Time Based Pricing, and its more technology driven cousin Dynamic Pricing, are good examples of how pricing has evolved as a result of our capacity to gather and analyze large amounts of data. Thinking of pricing as a continuum with a simple cost based approach on one end, and a more complex dynamic pricing system on the other, where does your company sit? Are pricing reviews within your firm driven by the need to address increased costs, or is pricing seen as a strategic element of the marketing mix due to its ability to increase profit?

About John Slauenwhite

John Slauenwhite is a sales-oriented marketer who balances strategy and action. His background includes large corporate environments, senior roles in international trade development, and global leadership in the B2B arena across multiple channels, plants, and product lines.