Do your products or services fluctuate in popularity depending on the season or competition? If so, dynamic pricing, or variable rates, might be the right approach for your business. 

But what is dynamic pricing and how can you use it in a small business? Well, you’ve come to the right place.

This guide covers dynamic pricing for small businesses, including:

  • What is dynamic pricing?
  • What are the pros and cons?
  • How can you use dynamic pricing in business?

What is dynamic pricing?

Dynamic pricing is a strategy that uses a variable price tag for goods or services to match changing market demand. The flexibility depends on what the sale could potentially be worth at a given time. 

The price of a product or service might increase if:

  • It’s in season
  • It’s in high demand
  • There’s low availability

On the other hand, the price might decrease if: 

  • The demand is low
  • There are a lot of cheap options
  • It’s not currently in season or trendy

Think about train tickets, labelled by ‘peak’ and ‘off peak’. Peak tickets are more expensive because people often travel at these times. 

Meanwhile, ‘off peak’ tickets are less expensive because the trains are emptier. This method helps control crowds while letting train lines maximise their profit.  

Why it’s effective 

Dynamic pricing works best when people pay more for something based on need or availability. If the demand is high, businesses have more flexibility with their rates. 

Meanwhile, what goes up must go down. Some people may wait for prices to decrease. As a result, they feel rewarded and appreciate the affordability. It offers balance to sustain your customer base.

Ultimately, dynamic pricing lets you earn more from a product or service when the market is strong. Then, it reduces your rates to promote sales when it’s not. When done right, this strategy can increase your profitability.

When to use it

Now that you know what dynamic pricing is, it may seem like a sure-fire approach. But, it’s not right for every business. If you want customers to accept your variable pricing, they must expect it and understand why

When you sell a product with a set production cost and stable market, you’ll likely want to offer a fixed or unchanging price. But if there’s changing competition or availability, you could get away with earning more. 

For example, if you rent bicycles by the beach, you might charge £5 per hour in the winter and £15 per hour in the summer. People will likely pay more in the summer because the weather’s warmer.

In general, there are a few types of business that typically use dynamic pricing, such as: 

  • Ecommerce like Amazon and Etsy
  • Ride services like Uber
  • Transportation and travel tickets 
  • Travel accommodation
  • Product rental services 
  • Wine and spirits

What are the pros and cons of dynamic pricing?

Before introducing dynamic pricing to your business, there are a few pros and cons to consider. Let’s go over the main ones.

The pros

Maximise profits

With varied pricing, you increase your profit margin when the market is in demand. Alternatively, you can earn more sales through lower rates when demand is low, sustaining profitability during less busy times.  

Increased competition and sales 

Responding to the market lets you maintain a competitive edge, so people choose your business more. 

At the same time, dynamic pricing teaches you about your customers’ habits, including how they respond to your price points. 

Efficient with automation 

With dynamic pricing, you don’t have to do things manually. There are automated tools that set rates for you based on data and AI. Not only does it help you earn more, but it’s efficient and time-saving to do so. 

The cons

Decreased reliability 

Frequently changing your prices makes you less reliable and trustworthy to customers. So, you’ll need to approach dynamic pricing transparently to sustain your customers’ trust

Potential price wars

Comparable products or services could turn dynamic pricing into a price war. If you fail to offer the cheapest option or most value, you could lose sales.  

For example, you might check Uber, a taxi app, and Bolt to see which ride service has the lowest rate. 

Lost business

Fluctuating prices could lose your sales. If someone has your product in mind, but the fees increase, they might decide against it. 

To sustain customer loyalty, you’ll need to ensure that your dynamic pricing is fair and as reliable as possible

How can you use dynamic pricing in business?

Thinking dynamic pricing is the best choice for your business? We can show you how to implement it. 

Determine your approach 

When setting up dynamic pricing, you’ll need to decide how to vary your rates. 

For example, you could use one of the following strategies: 

  • Time-based or peak pricing – your prices differ depending on the time of day, month, or year to match demand. 
  • Competitor-based pricing – your prices vary based on competitors’ rates. 
  • Value-based pricing – your prices change depending on how the public views the product and its market value.

Be sure to understand your market well so you can choose an approach that your audience responds to. 

Use an automated tool

You could measure typical shifts in market value and manually set dynamic price points. But, this can be complicated and time-consuming. 

If you want to get the most out of this strategy, consider using an automated tool. These tools are far more efficient, changing rates automatically based on your strategy, the market environment, and machine learning.

Here are a few pricing software options that might be useful: 

Be transparent 

When you implement dynamic pricing, be sure to communicate your approach well to customers. Doing so will help you remain trustworthy and transparent to your customers. As a result, you can sustain a strong brand reputation. 

Pricing strategies for stronger business  

With this article, you can implement dynamic pricing to increase your profits and strengthen your competitive edge. 

But if it’s not the right fit for you, you may want to consider other pricing strategies. Why not check out our article on the competitive pricing strategy next? 

Simplify your financial management with a clever app

As you introduce dynamic pricing, you’ll need to stay on top of your finances. 

Countingup is the business current account and accounting software in one app. It automates time-consuming bookkeeping admin for thousands of self-employed people across the UK. 

Save yourself time so you can focus on growing your business. 

Start your three-month free trial today