INTRODUCTION

Dynamic pricing is one of the most fundamental and commonly used revenue management tools.
It enables rms to increase revenue by better matching supply with demand, responding to shifting
demand patterns, and achieving customer segmentation. Since its early success in the airline
industry, dynamic pricing has now gained popularity in many other industries where revenue
management plays a central role, including the hotel industry, the car rental industry, the cruise
line industry, the entertainment industry, and the retail industry.
Most dynamic pricing problems in revenue management share the following three main
characteristics.
First, there is a given and finite selling season (or time horizon). Products in revenue
management applications are typically time-sensitive with a fixed selling season. For
example, most airlines start to sell seats several months before the departure time, and
most fashion apparel has a selling season that may only last for six to eight weeks.
Second, there is a given and finite amount of inventory of a product available at the
beginning of the selling season to be sold over time, and no inventory replenishment is
possible during the selling season. For example, airlines typically commit a particular
type of aircraft to a particular fight, and hence the number of seats on each fight is fixed
and no new seats can be added to a given fight. Similarly, due to a long supply lead time,
retailers often make a one-time order long before the beginning of the selling season, and
once the selling season starts, there is no opportunity to replenish the inventory if the
demand turns out to be higher than expected.
Third, pricing is dynamic in nature and the selling season consists of multiple periods
such that a different price may be set for a different period rather than having a single
price for the entire season (which is called fixed or static pricing). It is possible that in
some extreme cases, the optimal price in each period happens to be identical and hence a
fixed pricing policy is optimal.
What is Dynamic Pricing?
Dynamic pricing, also called real-time pricing, is an approach to setting the cost for a product or
service that is highly flexible. The goal of dynamic pricing is to allow a company that sells goods
or services over the Internet to adjust prices on the fly in response to market demands.
Changes are controlled by pricing bots, which are software agents that gather data and use
algorithms to adjust pricing according to business rules. Typically, the business rules take into
account such things as the customer's location, the time of day, the day of the week, the level of
demand and competitors' pricing. With the advent of big data and big data analytics, however,
business rules for price adjustments can be made more granular. By collecting and analyzing data
about a particular customer, a vendor can more accurately predict what price the customer is
willing to pay and adjust prices accordingly.

Dynamic pricing is legal, and the general public has learned to accept dynamic pricing when
purchasing airline tickets or reserving hotel rooms online. The approach, which is sometimes
marketed as a personalization service, has been less successful with online retail vendors.
Dynamic pricing can be contrasted with fixed pricing, an approach to setting the selling price for
a product or service that does not fluctuate.

Dynamic pricing issues

1. Customer perception
Many consumers aren't aware of the fact that retailers alter prices on a regular basis, and did so
even before the advent of online retail, but as it becomes more noticeable thanks to the web,
retailers must consider the perception issues it raises.
Put simply, a customer who observes that a product can become cheaper or more expensive
within minutes may not be thrilled at the prospect that they could end up paying more for a
product based on little more than, say, the time of day.
Particularly worrisome is the possibility that some users will notice dynamic pricing, but won't
quite understand what's going on, resulting in a reduction of trust.
2. Data accuracy
Dynamic pricing depends on data, and when pricing is being changed on the order of hours or
even minutes, ensuring that the data driving pricing decisions is accurate is critical. While there's
a growing ecosystem of data providers and the techniques by which data is collected and filtered
are sure to improve, retailers shouldn't assume that bad data won't make it into their systems.
3. Algorithm mishaps
Wall Street and the phenomenon of flash crashes reminds us that algorithms are far from perfect
and can produce costly errors. As retailers embrace dynamic pricing models which are of course
based on algorithms, thought should be given to how mishaps can be minimized and what
policies will govern when a mishap results in a big mistake (eg. customers being able to purchase
a product at a ridiculously low price).

4. Altered customer behavior

As the existence of dynamic pricing becomes more evident to consumers, retailers will need to
grapple with the possibility that it could impact customer behavior.
On one hand, dynamic pricing clearly has the potential to encourage sales, but is it possible that
in some instances it could it impede sales? If customers come to believe that the price of a
product might go down in the very near future, and perhaps even on the same day, it's not
unfathomable that some of them would decide to hold off on a purchase.
And as every retailer knows, a delayed purchase is much more likely to become a purchase that
never happens, or happens somewhere else.
5. Overall experience
While price is an important factor in purchasing decisions and is often the most important factor,
retailers should remember that their long-term success will likely depend on their ability to offer
much more than that.
Customer service, selection, shipping, return policies and loyalty schemes can also help drive
sales, even when a retailer can't offer the lowest price. These things are often crucial to fostering
the brand positioning and customer loyalty retailers covet, so embracing dynamic pricing without
addressing overall customer experience is short-sighted.

Dynamic pricing using by the companies

Amazon changes its price every 10 min on an average
The most notable proponent of dynamic pricing is the airline industry the sheer range of
variation of ticket price can surprise even those who are in knowledge of this widespread
practice. The airlines have been able to maximize their profits using this. The ecommerce industry statistics point out that Amazon changes its price every 10 mins on average 1.
They have been intelligently using dynamic pricing for more than a decade to undertake
empowered business decisions. Offline retailers like Walmart have also followed suit in recent
years.

Not leveraging pricing as a factor to drive sales? You are missing out on a big chunk of
your revenues.
With technology as its backbone, the e-commerce retailers have the complete information from
the pages browsed to the time spent on each page to the past purchase data. Moreover, you
cannot simply change the price tag once a customer steps into the store, but in an-online
counterpart you can change the prices for every customer who logs in using a plethora of
information including browsing history.
Just think of a case where you browse through a product category for a long time and yet does
not carry out a purchase transaction. In such a scenario, the e-commerce retailer has the data
available and can roll out an immediate 24-hour expiry coupon for the purchase within that
product category. This not only sounds interesting from a user point of view, but also makes
business sense for the retailers.
If a number of e-retailers offer a standardized product, then in that case, price becomes the
differentiating factor. Consider the following example for Samsung Galaxy S5:

Opportunities associated to dynamic pricing

The top three reasons why dynamic pricing is more than just a trend in retail:
1. It Contributes To A Strong Business Strategy
Traffic, conversion rates and demand all vary based on the time of day, season and more.
Dynamic pricing is a way to test the price elasticity of demand and has the potential to
make a huge impact on revenue and profit. For example: If a retailer is selling a toy thats
been labeled the hot item of the season, they can probably bump up the price and enjoy
profit they would have otherwise missed out on. The opposite is also true. If youre
carrying a toy thats no longer a top seller, you can lower the price to increase sales and
move inventory.
2. It Has Proven Useful In Many Industries
Dynamic pricing makes sense in many areas, such as the sports industry. Many teams
have started to use dynamic pricing while selling tickets. By increasing ticket prices
before a big game, many teams have boosted revenue. Amazon is one of the retail giants
leading the push for dynamic pricing. While Amazon might make it seem like dynamic
pricing is just about lowering prices to be hyper-competitive, price increases are just as
important. Take the airline industry. Some days are popular for traveling, while others are
slower. By dropping prices on the slower days, airlines are able to fill flights and make
the
most
out
of
their
existing
routes.
3. It Is Used By Retail Leaders
Dynamic pricing provides plenty of benefits for retailers. Amazon and Walmart are two
well-known retailers that use dynamic pricing constantly. Amazon changes prices as
frequently as every 10 to 15 minutes on many of its products, and its sales rose by 27.2%
in
2013.
Walmart changes prices about 50,000 times per month and its online sales eclipsed
Amazons, with a 30% increase in 2013. Retailers like Amazon and Walmart use dynamic
pricing because it allows them to stay up-to-date on competitor pricing, pricing trends
and avoid getting left behind the competition. However, dynamic pricing can be difficult
to manage. Because of this, many retailers have turned to technology to automate what
was once a manual process.

Forrester Research estimates that price optimization software improves gross margins by 10%
and can make a huge impact on sales and profit. To put any fears to rest, retailers using an inhouse or third-party dynamic pricing software can set reprising rules to ensure that their pricing
always matches their brand identity and never goes below cost. As an added bonus, there is no
possibility
of
unwillingly
engaging
in
a
margin
depleting price
war.
Dynamic pricing is the future of pricing strategy for retailers. The world has experienced
incredible technological advances over the past decade, and dynamic pricing is certainly one of
the most monumental. It is becoming the standard in the retail industry and the future seems
bright for this trendy strategy.
Lets look at how dynamic pricing can be an important tool for revenue maximization.
What is dynamic pricing?
It is a price-to-market technique where rates are adjusted based on the demand and supply
pattern. In India we see this model already functional in the airline sector. Flight ticket prices
fluctuate depending on the number of seats sold on a specific flight. Thats why ticket prices rise
closer to the date of departure.

Why hotels should adopt a dynamic pricing strategy?

In the hospitality sector, dynamic pricing model had been adopted by a few global hotels such as
Marriott and Hilton in the early 2000s. However, more and more hotels are now adopting this
model including hotel chains such as Taj properties, ITC and Leela. It is being seen as a strategy
to offer cost-based pricing during off-seasons to cover their operational costs, while hotels can
charge higher room rates during peak seasons to maximise revenue.

In fact, dynamic pricing is becoming a very popular model between hotels and travel companies.
Here dynamic pricing is realised as the percentage of discounts hotels offer on their best
available rate to travel companies. According to a survey report by GBTA, some travel
companies feel that dynamic pricing is the best cost-saving proposition particularly in cases
where they dont drive sufficient volume to qualify for a corporate discount.
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How to overcome the challenges of dynamic pricing?

While dynamic pricing is emerging as one of the major trends of revenue management, there are
still several challenges that hotels face which is stopping it from being adopted on a large scale.
For an efficient dynamic pricing system, the revenue manager has to be at the top of his game at
all times. There are two parts of dynamic pricing arriving at a daily time-based pricing mix and
forecasting a long term price strategy.

To achieve the former, revenue managers should have access to a responsive revenue
management system with integrated business process that allow them to track important metrics
such as occupancy, ADR, channel performance, room availability and customer demand realtime so that pricing decisions can be made quickly. Coupled with a strong distribution system
where rate updates and packages can be published real-time across all channels will not only
boost yield but also provide for transparency in hotel rate strategy.

Arriving at a long term pricing strategy can be a bit more complex. Revenue managers need to be
able to assess customer demands and booking patterns from the previous years and predict the
same for future. An efficient long term pricing strategy, where revenue managers can show the
predicted volume of business in the coming year and the forecasted room rates per room type and
season, can be a great way to win trust of travel companies and encourage them into entering a
dynamic pricing business model. But if such predictions turn out to be incorrect, the hotels
business can really take a hit.

However, with advanced technology, revenue managers can now resort to business intelligence
applications that not only record data year-on-year but can also translate them into
understandable trends and patterns for revenue managers to take agile decisions. Assisted by
reliable prognostic analytic applications, revenue managers can not only forecast budget and
price trends till the last available inventory ahead of time but also automate the revenue process
by setting their top and bottom-line objectives. This simplifies the challenging process of
dynamic pricing to a great extent and also allows for the revenue managers to capitalise on
changing marketing conditions real-time and stay ahead of competition.
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Dynamic pricing in real-time: Where online retail is headed

Posted on October 23, 2014August 21, 2015 by Angelica Valentine

What will be responsible for taking ecommerce as we know it to the next level? Many trends
have taken e-commerce by storm lately, from omni-channel retail to social commerce, but the
real answer can be found in the strategies that have made behemoths like Amazon and Best Buy
so successful.

Why Dynamic Pricing Matters

Dynamic pricing is necessary in online retail because shoppers are highly price sensitive and the
market is hyper-competitive. The rise of mobile has made this even truer. Shoppers now have
price comparison engines at their fingertips at all times through desktop, mobile sites, and apps.
Therefore, retailers need to be aware of competitor pricing changes and have the ability to react
in real-time. This gives them the opportunity to be competitive and, more importantly, remain
profitable no matter whats happening in the market.

How Price Elasticity Fits In

Price elasticity, or the effect that small price changes have on the demand for a given product, is
a big part of dynamic pricing. Testing price elasticity is a great way to find the optimal price
when introducing a new product to the market. Dynamic pricing makes it possible to A/B test the
prices of products and based on that, online retailers can figure out the price elasticity for
specific products.

BIBLIOGRAPHY
http://whatis.techtarget.com/definition/dynamic-pricing
http://www.businessdictionary.com/definition/dynamicpricing.html
http://www.csmonitor.com/Business/SavingMoney/2013/1104/Everything-you-need-to-know-aboutdynamic-pricing