Monday, January 18, 2010

Dynamic Pricing

Dynamic pricing allows for the point-of-sale price adjustments to take place for customers meeting certain criteria established by the seller. The most common and oldest form of dynamic pricing is haggling; the give-and-take that takes place between buyer and seller as they settle on a price. While the word haggling may conjure up visions of transactions taking place among vendors and customers in a street market, the concept is widely used in business markets as well where it carries the more reserved label of negotiated pricing.

Advances in computer hardware and software present a new dimension for the use of dynamic pricing. Unlike haggling, where the seller makes price adjustments based on a person-to-person discussion with a buyer, dynamic pricing uses sophisticated computer technology to adjust price. It achieves this by combining customer data (e.g., who they are, how they buy) with pre-programmed price offerings that are aimed at customers meeting certain criteria.

For example, dynamic pricing is used in retail stores where customers’ use of loyalty cards triggers the store’s computer to access customer information. If customers’ characteristics match requirements in the software program they may be offered a special deal such as 10% off if they also purchase another product.

Dynamic pricing is also widely used in airline ticket purchasing where type of customer (e.g., business vs. leisure traveler) and date of purchase can affect pricing.