What is demand-based pricing definition and advantage
Demand based pricing is a pricing strategy used to set prices in the market based on customer demand for a service or product. In this pricing strategy, a product or service’s price is determined by the level of demand for it in the market. Generally higher when demand is high and lower when demand is low. Depending on the market or time, this pricing strategy adjusts the price to maximize revenue or profit by taking into account varying demand levels.
Instead of relying on fixed prices that may not reflect current market conditions, businesses can adjust their prices dynamically in response to market changes considering delivery and production costs as well.
Demand based pricing strategy is widely used in industries like travel, hospitality, fashion and entertainment. Where the prices of a product or service fluctuate depending on availability, popularity and seasonal demand.
Methods of Demand based pricing
Price Skimming
The concept of price skimming is where the price for an initial service or product is set high and then slowly lowers the price over time. Price skimming is used to maximize product profit in the initial run and usually targets early adopters who are ready to pay more for the latest product or service.
Price Discrimination
In this method, the price of a product is adjusted in real-time based on demand in the market. Different pricing is set up for different markets and customers to maximize profit
Value-Based Pricing
Value-based pricing is a pricing strategy based on the actual value of an item or service. In value-based pricing, the price of an item is set on the benefit and value it provides to the customer instead of pricing it on the cost of production.
Value-based pricing helps companies maximize profits by pricing the product at a premium price depending on the value. This strategy helps companies get ahead of their competitors and increase brand value
Bundle pricing
In this pricing strategy, multiple products or services are bundled together as a package and offered to customers at a discounted price. Bundle pricing is often used to attract more customers and encourage them to buy more than they would if they purchased each product or service separately.
Penetration Pricing
In the penetration pricing strategy, initial pricing is set low for a newly launched product or service. This strategy aims to attract new customers and increase the customer base. After gaining traction, the price of the product gradually goes up. Penetration pricing is often used to increase market share quickly and discourage competitors from entering the market.
Psychological Pricing
Psychological strategies aim to understand how people think and feel about pricing and take advantage of their emotional connections. Ultimately, the goal is to increase sales and revenue by influencing customers’ perceptions of product or service value.
Demand-Based Pricing Advantages and Disadvantages
Here are Some advantages and disadvantages of demand based pricing strategy
Advantages
Increase In Revenue
Demand based pricing helps businesses maximize their profit by adjusting their product or service price as per market demand. When demand is high, companies can increase product prices and earn more profit. When demand is low, the price can be reduced to attract new customers and retain existing ones.
Efficient Use of Resource
Businesses can ensure the efficient use of resources by adjusting prices in accordance with demand. In this way, organizations can avoid overstocking or understocking, which could result in lost sales or higher inventory costs.
Better Customer Experience
Using demand based pricing, businesses can attract more customers and increase their market share. With the right pricing for the market situation, businesses can serve more customers and improve customer satisfaction.
Disadvantages
Unfairness
In Demand based pricing, product prices are different in different markets and businesses can change pricing over time as per market demand. Some customers might feel that they are being charged more which can lead to negative publicity and loss of customer trust.
Complexity
Executing this strategy is challenging because of its complex structure. Businesses need to track market demand and adjust prices in real-time. To implement this strategy businesses require resources and expertise, which can be challenging for small businesses.
Difficult to predict
Demand based pricing depends on accurate demand forecasting and real-world market data which can be challenging to collect. If demand does not meet business expectations, businesses may need to reduce product prices or they might risk losing their revenue
Demand based pricing Example
Travel Industry
In the travel industry ticket prices can fluctuate from time to time based on location, season, and availability. If we book tickets in advance or in a bundle we will get them at a discounted price, If we book tickets near departure time companies or authorities might charge a higher price and the price can go up drastically with every time passes.
Hotel and Hospitality Industry
Same as the travel industry In the hotel industry you will get discounted price if you book in advance. Hotel Prices fluctuated based on the hotel location. If you book a hotel near a travel spot you will have to pay a higher price
Entertainment Industry
In the entertainment industry, more popular actors get paid more than lesser-known ones because popular actors have more face value and demand in the audience.