#019: Is Dynamic Pricing Right for Your Industry?
The pros and cons of dynamic pricing and why personalised pricing might be a better solution for most.
What is Dynamic Pricing?
Even among pricing professionals, there are different interpretations of what dynamic pricing means.
A few days ago, a LinkedIn connection shared that he's developing a FinTech solution to automate dynamic pricing for retail banks.
This got me thinking: how does dynamic pricing fit across industries, and is it always necessary?
Before going deeper into today's topic, let's clarify what dynamic pricing is.
What is Dynamic Pricing?
Here’s a straightforward definition of dynamic pricing:
Prices are adjusted automatically to balance supply and demand in real time or over short intervals.
These adjustments are typically driven by market conditions, seasonality, and competition.
It often applies to perishable goods or time-sensitive services.
Now that we are aligned on the basics let’s look at industries where dynamic pricing might not be suitable:
Industries where price stability is crucial
Luxury or Prestige Products
Industries Based on Trust and Transparency
Industries Where Price Stability is Crucial
Price stability is essential for some industries due to regulations, ethical concerns, or customer expectations.
Dynamic pricing in these sectors could lead to a loss of trust. A few examples:
Essential utilities like water, gas, and electricity.
Public transportation.
Compulsory insurance.
Prescription drugs.
Basic food staples.
These industries typically provide products or services people rely on for daily needs.
Often, governments regulate prices to ensure fairness and accessibility. Even without regulation, frequent price changes could backfire—remember Wendy’s ill-fated "dynamic pricing" experiment?
Luxury or Prestige Products
In luxury markets, price is often a signal of quality and exclusivity. Any fluctuation could dilute brand prestige. Examples include:
Luxury goods such as high-end fashion.
Prestigious universities offering higher education.
In these industries, frequent price adjustments can dilute the brand’s value. This is why luxury brands rarely drop their prices despite unsold inventory and challenging market conditions (Did you see the recent Kering result? Another topic worth discussing next time).
Industries Built on Trust and Transparency
For businesses relying heavily on trust, dynamic pricing can harm customer relationships. It may cause customers to feel taken advantage of or question the service’s value.
Examples include:
Funeral services.
Legal services.
Banking services.
While most would agree that dynamic pricing doesn’t fit funeral and legal services, banking is a more nuanced case.
Let’s break down why I think it is not so well suited:
Interest rates
Bank product pricing—loans, mortgages, and deposits—is primarily driven by central bank rates, which don’t change frequently enough for dynamic pricing to be effective.
Competition
Most competitors don’t adjust rates daily (I know for a fact that certain bank/product lines could leave the margin the same for years).
Even if they do, real-time data on rate changes is hard to access, especially for preferential or Relationship Manager-driven discounts that are applied for higher value customers.
Market conditions
In banking, quarterly updates usually suffice to reflect market shifts.
If you’ve followed this far, you might wonder …
Am I Missing Out on Advanced Pricing Models Without Dynamic Pricing?
The answer is no.
If your products aren’t perishable and don’t require real-time price adjustments, you can still benefit from advanced pricing models, including those that leverage AI, by considering personalised pricing.
What is Personalised Pricing?
Personalised pricing tailors prices based on individual customer data, such as purchase history, demographics, location, or behaviour.
The goal is to match the price with each customer’s willingness to pay, enabling more accurate segmentation.
I believe personalised pricing offers greater benefits than dynamic pricing for many industries, and here’s why:
Most products are not perishable, allowing companies to adjust supply to meet demand.
Personalised pricing aligns with a very important pricing principle - Value matching. Customers pay more because they perceive higher value, not because of limited supply.
What’s Your Take?
Does dynamic pricing make sense for your industry, or would personalised pricing be a better fit? I’d love to hear your thoughts.
Have a great weekend!
Cheers,
Claire
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