We all know that business absolutely refuses to follow those beautifully consistent budget numbers; that revenues rise and revenues fall day by day and month by month. So, at certain times of the cycle, demand is low and at other times it’s high.
But we often set prices once and for all, ignoring these demand cycles. And what does that mean to profits and sales?
On this graph, demand, in blue, rises and falls. The price in dark red is a straight line across the time scale. Demand rises above the price line and then dips below the price line.
When demand is high, sales and profits roll in because the price is lower than would be predicted by a simple analysis of demand and supply. But, when demand dips below the price line, the company is priced out of the market. Below the line is lost sales (RED areas) and above the line is lost profit. Why?
If demand is high and you are the lowest price, you get the business but you have given up a profit opportunity to carry you through the business cycle.
If demand is low and your price is high relative to the demand, then no one buys from you and sales go down.
This can be changed. Dynamic pricing takes into account micro changes in demand and adjusts the price accordingly. We have all seen this. Hotels charge a premium in the high summer months but offer bargains in the winter. Want to rent a moving van at month end? Pay the price! And of course, gasoline prices shoot up just before the first long weekend of the summer. Airlines used to reward the late arrivals at the airport by offering best price seating in response to an analysis that it was better to fly with a passenger in the seat at any price than flying empty. Of course, they found that this rewarded bad behaviour and have reversed the offering, charging more to the last minute traveller.
On a more sophisticated level, the Economist reported the use of dynamic pricing software being used in pubs in London to reflect demand during “happy hour” right after work, versus the early evening drinking crowd. Prices moved by the quarter hour.
Dynamic pricing also works for longer time scales. Every year in the Pacific Northwest of Canada , the lawn mowing season opens in April. Almost immediately, there is a rush to get the mower tuned up or repaired. One repair shop owner contacted his customer base in the dead of winter and offered special pricing and free storage for machines brought in immediately instead of waiting for the mowing season to begin.
Smart ideas for smart times! Dynamic pricing works.