Dynamic Pricing

Dynamic pricing as the name entails is a pricing strategy/tactical system, where prices get’s adjusted or modified to maximise margins without losing business. Aka improve bottom line while keeping the top line same. In best cases, grow both top and bottom line if well optimised. An approach that allows one to price products appropriately.

Dynamic pricing is already a known phenomenon in certain industries/verticals like airline and hotel industry but is now being adopted by retail industry as well. Based on my experience working on these models. It’s a fantastic tool/approach when leveraged the right way. Mixing up the right strategy with appropriate tactical Data Science or machine learning models. Also called as AI in 2025 given that all ML/DS work is being clubbed under this umbrella term.

Why Airlines/Hotel Industry use it?

Both these industries run on selling a time bound inventory that needs to be exhausted or consumed before the event aka either a specific flight or a hotel stay on a specific day. Since, the inventory is perishable, not pricing it correctly results in loss of business in terms of occupancy!

To add to the challenge you have multiple sites selling this inventory at multiple different prices and so on! The prices can vary significantly and there are plenty of platforms that just build to do price comparison across multiple platforms/options.

The Challenge

In retail space, where it’s still a new concept, dynamic pricing can be challenging to implement given people are not used to fluctuating prices especially for staples and key goods except when it comes to perishable ones like Fruits & Vegetables!

Similar to the hotel/airline rooms & seats, fruits/vegetable expire after some time, thus making managing their inventory a challenge and a need to involve dynamic pricing as a lever to manage the inventory to maximise both margins and the business.

• Too low prices : we fail to make enough money on each SKU
• Too high prices : we fail to sell our goods

Online retails have an advantage where by tracking their inventory and throughput of sales, they can dynamically adjust their prices to maximise their margins and they should if they are not already doing it!

How to maximise margins without hurting the business in the long run!

Customer Perception

Along with dynamic pricing, the counter challenge to take care of is the long term customer perception. Knowingly or unknowingly, businesses if not careful end up being tagged into one of the categories in their respective business.

Market Segments

• High Quality: Business that provides quality services or best in class products whether that’s airline, hotel or a premium grocery retailer.
  • The businesses in this side of the spectrum are priced higher than their competitors and offer very low discounts. E.g. Taj, erstwhile Kingfisher Airlines or Waitrose in UK!
  • Here the strategy is to sell premium stuff to premium customers.
  • Dynamic pricing is not very useful or relevant here, pricing is all about strategy! It is the business model
  • The volumes are typically lower as share of the overall business.

• Quality vs Price Variance: Businesses who have a high variance in quality and price. They operate at a fairly large spectrum in terms of both quality and price. The businesses in this category have a wide variance in price <> quality. E.g. Marks & Spencers in UK!
  • Dynamic pricing is key here since they have high variance in produce/goods so there is a need to manage throughput of inventory and often these entities will run offers/discounts to boost sales etc.

• Cheapest Price: These businesses are the lower rung in the quality order. They are also mostly likely the largest players in the business. This could be one player or a bunch of dis-organised multiple small stores/airlines or budget hotels.
  • They are likely to be the cheapest and pricing is the key lever to bring business.
  • Dynamic pricing here could be useful in certain parts of pricing decisions like liquidation and so on but again not as effective as the 2nd player.

Overall Questions

Depending upon the nature of the business and it’s positioning within it’s vertical. Dynamic pricing of goods is an opportunity across multiple decisions?

• What products should be priced at what margins?
• How frequently should prices change?
• What products should we maximise margins?
• How to balance stock liquidation vs demand planning?
• Completely automated vs Manual Updations ?

These are all the broader tradeoffs to be made when designing these systems? The right system is a mix of algorithms with manual/operational guardrails to safeguard against edge cases. Since a completely automated system with no manual inputs is practically unfeasible.

Pricing is often the most customer facing and strategic decision. But at the same time, the business needs to be make multiple micro decisions at optimise the business. The right system separates strategic and tactical decisions.

• Humans decide the strategy
• Systems make the tactical optimisations

This way, the overall business operates with a clear synergy!