What’s Dynamic Pricing?

In late February 2024, US fast food chain Wendy’s announced a decision that generated a lot of media interest: the introduction of so-called Dynamic Pricing starting from 2025. The decision attracted significant criticism from media outlets and consumers, who saw parallels between this initiative and others such as Uber’s “surge pricing”. In the end, Wendy’s tracked back to an extent, and the media storm quickly calmed down. But what is dynamic pricing, exactly?

When we think about the price of a product or service, we tend to picture it as relatively static: the Pricing Team (or another resource in the case of SMEs, often the Sales Director or the owner themselves) decide – based on their strategy and their volume/margin objectives – that product A will be sold at price X, and the price largely stays unchanged outside of occasional discounts. Only when the context changes significantly – for example when the cost of materials goes up – the price is corrected, usually upwards, and remains unchanged until the context changes significantly another time, and so on.

That’s how prices work in many sectors: FMCG, restaurants, manufacturing… However, other sectors work differently – here, products and services change price every day, or even multiple times per day. Their pricing is, in other words, dynamic.

In dynamic pricing, costs and margin objectives are only two of the variables that factor into the final price, alongside others such as demand, product availability and competitor prices. The objective of dynamic pricing is to maximise the firm’s profitability by tactically lowering prices during “slow” periods – in order to attract a few more clients – and tactically increasing them during more “intense” periods – in order to extract more margin from situations where demand is so high that the company can afford to turn a few potential customers away.

Heaven for businesses and hell for consumers? It could certainly look that way, and it is true that customers who are forced to buy at a specific time may end up paying a lot more for the same product or service. For example, a person who needs to book an Uber to go home at 4am – when public transport is not running and walking across town is not a particularly appealing option – will have to accept Uber’s quoted price no matter how high it is. Uber know they are the only realistic option here, and they increase their prices accordingly (the “surge pricing” mentioned above). However, for most consumers – who can be flexible in terms of when they buy – dynamic pricing usually means “better deals”, because unlike surge pricing, dynamic pricing moves prices both up and down.

Who uses dynamic pricing today? Here are a few examples:

• Airlines: possibly the best-known use case. If I want to fly from Rome to London, I will pay less if I book sufficiently in advance – when demand is still low – and if I am willing to fly mid-week, rather than booking three dayd before my chosen date and picking the Saturday morning flight.
• Hotels/AirBNB: large hotel chains are very familiar with dynamic pricing and systematically apply it, but boutique hotels and B&Bs have now started to do the same, often with the help of platforms like Booking.com which dynamically adjust prices in order to maximise bookings (and by extension their own commissions).
• Petrol stations: in countries such as Germany, fuel prices can change up to 18 times per day! Petrol stations are constantly “watching” each other – when one changes price, the others tend to follow within the limits imposed by their own strategies. In countries like France, this process is heavily automated, as there are Government portals that display the real-time prices at all petrol stations in the country – so all that fuel retailers have to do is schedule frequent downloads of this data, and they will always know what is going on in the market.
• Uber and other ridesharing apps: Uber – as previously mentioned – applies surge pricing to maximise profits during high-demand periods.
• Amazon and other online stores: product prices on Amazon fluctuate daily, to the point that there are websites allowing users to track the price of a given product and quickly know whether they are getting a good deal or not.

But dynamic pricing can be applied outside these industries too. Here are a few examples:

• Fast Food: Wendy’s wants to introduce it, McDonald’s tried but experienced technical difficulties. But there are simpler ways for fast foods to introduce dynamic pricing, such as discount codes and tactical promotions at set times of the day.
• Public transport: why does a subway trip cost the same at 3pm on a Tuesday – when the train is basically empty – and at 6pm on a Friday, when the trains are full? Smartly applying dynamic pricing in the public transport sector could also help local authorities achieve other objectives, for example by reducing car use during the day – meaning less traffic, less pollution and less chaos.
• Events: some concerts and festivals do it already – think about surge pricing when the Oasis tour tickets were released, but also think about “early bird” discounts. Why not go beyond? For example, football clubs can divide league matches into three categories (Gold, Silver, and Bronze) with different prices for each – the idea is to increase sales for minor matches and maximise margins for key matches.
• Museums and amusement parks: here too, some already do it, but ther are still way too many museums and amusement parks that apply the same price 365 days a year, when they could differentiate their prices based on season and time of the day.
• Gyms and Spas: some gyms offer “off-peak” memberships, which is a very simple and effective example of dynamic pricing, but there are many other approaches that are equally simple and even more creative.

Do you think Dynamic Pricing can help your business to maximise its profits? Let’s chat about it. Dynamic Pricing can be S.M.A.R.T. Pricing, and if it is the right solution for your business I can help you implement it simply and effectively. Book your free intro call now.