Business

Study Notes

Dynamic Pricing

Level:
AS, A Level
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Dynamic pricing is a pricing strategy in which businesses set flexible prices for products or services based on current market demands.

The aim of dynamic pricing is to allow a business that sells goods or services online and/or via mobile apps to adjust selling prices on the fly in response to changing market demand.

These "dynamic" pricing changes are done automatically by software agents that gather data and use algorithms to adjust pricing according to business rules.

These dynamic pricing rules will often take into account factors such as

  • The customer's location
  • Time of day
  • Day of the week
  • Level of demand
  • Competitors' pricing

Dynamic pricing is legal and is increasingly widely used. You have probably seen it in action when buying tickets, reserving accommodation online or ordering a lift from a service like Uber.

Example of Dynamic Pricing: Uber and Surge Pricing

Uber's model of surge pricing is perhaps the best (and one of the most controversial) examples of dynamic pricing in action.

Uber’s pricing algorithm automatically detects situations of high demand for taxis and low supply (Uber drivers out on the road) and raises the price in increments, depending on the scale of the shortage. Those higher prices are supposed to make Uber drivers more likely to make themselves available, putting more Uber cars on the road when they’re most needed.

The video below explains Uber surge pricing in more detail.

Example of Dynamic Pricing: Baseball Ticket Prices

Major league baseball teams in the US have made increasing use of dynamic pricing to alter ticket prices based on a variety of factors such as:

  • Opponent
  • Weather
  • Recent team performance
  • Day of the week

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