Have you ever wondered why Uber is like $0.13 sometimes and $7
million other times--
literally takes your first born child--
or why the hotel rooms you wanted to book for your Cancun
spring break trip did not seem like they were normal market
price?
What's going on?
Two words for you--
dynamic pricing.
What's up?
It's Jamal from HubSpot.
And in this video, I'm going to break down
the basics of dynamic pricing, a common pricing strategy used
in tons of industries today.
As always, if you find this content valuable,
make sure to give this video a like
and subscribe to the HubSpot YouTube channel.
[MUSIC PLAYING]
Now, let's start at the beginning.
What the heck is dynamic pricing and why does it
sound kind of exciting, like some kind of Wall Street thing?
Is Jordan Belfort involved?
As well as it sounds, it's a pretty intuitive concept.
Dynamic pricing, also known as surge pricing, demand pricing,
or time-based pricing, is a pricing strategy
where businesses adjust the prices of their offerings
to account foR A change in demand.
Think about all those times you try to book
your seat on a flight and the price of your ticket changed
based on how many seats were left on the plane,
whether you opted for that extra legroom in the emergency aisle,
or whether you were booking your flight further in advance.
At the core of every pricing strategy is one thing, profit.
And dynamic pricing is no different.
This strategy aims to maximize profit based
on time-based opportunity.
And there's basically an art to how
the price offered to customers is calculated
to match what customers are actually
willing to pay for what they're selling at that moment.
In other words, that's why you end up seeing multiple price
points for the same thing.
Dynamic pricing is the strategy of choice for these industries
to list a few-- hospitality, transportation, airlines
and ridesharing, gas and electric companies, retail
and e-commerce, event ticketing, and real estate.
Some of the core factors that play
into how price is determined are supply and demand, value,
market trends, seasonality and time
of year, competitor pricing.
Let's put things into perspective with Uber.
You're calling up a number on a Friday summer evening
for a night out on the town with your friends.
The minute you request a ride on the app, Uber's dynamic pricing
algorithm kicks in to calculate your final price based
on variables they set-- the time you're calling your ride,
distance of your route, how much traffic there is on the road,
and the current rider to driver demand.
Now, if you're calling on a summer evening
and you're in a popular city, chances
are that there are a bunch of other people also requesting
rides at the same time as you.
This means that there's an increase in demand
and thus higher need for supply of drivers.
Because Uber wants to make sure that there
will be enough drivers or supply,
their algorithm increases the price of a ride
to what is known as the surge price.
The app then notifies users that they are now
seeing a surge price as well as lets drivers
know that the Uber fare increased
so that they are incentivized to head to that area.
With this method, Uber is giving riders two options--
either pay the higher price for a ride
or wait a few minutes to see if the rates go back
down once there's less demand.
In both scenarios, Uber benefits,
since they are getting users to pay a higher
price for a more valuable ride.
Or they're able to manage the amount of demand
they're seeing by having users wait for a cheaper ride.
Uber, I see what you're doing.
So you can see that dynamic pricing can really
work in a business's favor, because it's
centered on so many factors that are expected to fluctuate,
like how more people tend to go out on the weekends.
But with great power comes great pricing differences.
So here are the pros and cons of this pricing strategy
that you should consider.
Some pros of dynamic pricing are that, first, employees
can be paid a higher wage during busier times.
With dynamic pricing, you have the flexibility
to reward and incentivize your employees
during busier stretches.
Think about how some Uber drivers choose
to drive during surge price hours
so they can make more money in less time.
Second, dynamic pricing allows you to still sell in downtimes.
Even when demand is lower, you'll still
be able to get those sales.
There will always be times when people just
are less inclined to buy whatever it is you're offering,
so leveraging this pricing strategy
is great for still having some business whenever this happens.
Plus, some customers may actually
become more interested in purchasing
when they see that your prices are lower than usual.
Now for some cons.
The major con is that with dynamic pricing
you run the risk that customers might feel cheated and trust
you less.
I mean, it makes sense.
People do like consistency, and I can tell you
how mad I got when I saw the shirt I bought a week ago
is now a whole $10 cheaper than what I paid for it.
Oh, they scammed me.
So if customers see what they think
is a fair price on your product or service one day
and see it offered at a better price the next,
they might feel like you're being too opportunistic or flat
out unfair.
And if you overdo changing your prices,
you run the risk of losing precious business.
Oh, that shirt.
This goes to show that dynamic pricing is not
a pricing strategy that can be applied to all industries.
But when it's done right, you can see great returns.
Speaking of great returns, if you
want to skill up in any aspect of your business
or professional development, we've
got you covered with hours of HubSpot Academy content,
all designed to accelerate you and your business's growth.
Check it out in the description below.
Now, as an easy way to consider if you should
use a dynamic pricing strategy for your business,
here are three boxes you should see
if your business checks off.
One, your business has the capacity
to gauge how and when demand shifts.
To see if this point applies to your business,
try coming up with some factors that fluctuate
for you on a regular basis.
In retail, stock and seasonal trends
can dictate purchase behavior for example.
In hospitality, tourism spikes, room availability,
and nearby events are worth considering.
Two, your business has a customer base
that is willing to pay non-static prices.
If your customers aren't the type that
expect fluctuating prices for your service or product,
then they probably won't be happy to see it happening.
A dynamic pricing model wouldn't be
the best fit for cleaning or moving for example.
Because if word gets out that one customer got a better price
for the same exact service, it's not the best look
for your business.
A good rule of thumb for determining
if your customers are willing to pay non-static
is to ask yourself whether customers
have a general idea of what they should be paying for it.
And if possible, you can also run some tests on your own
to see if customers are accepting any slight price
changes and analyze the impact.
Three, your business has sufficient market power
when setting prices or industry peers are also doing the same.
In order for customers to accept the prices you're offering,
your business will definitely need
to have some street cred or weight in your industry.
Or else customers could view your services
as less legitimate than other companies.
Uber truly was one of the leaders in the ride share
movement, and now they're one of the most established names
in the industry.
And as a result, they're one of the companies
that users turn to see if prices are standard or not.
If your business checks all three of these boxes,
consider trying out these dynamic pricing
for two different scenarios.
The first way is pressing for an event.
If you're selling tickets for a webinar, conference,
or any other live event, you can offer
varying prices based on how close to the event date
you are, what times or days are expected to be more popular,
and the tiers of tickets you're offering.
Coachella is known for holding an advance ticket sale which
is the buyers only opportunity to take advantage
of the Coachella payment plan that
allows attendees to pay for their ticket
on an installment plan.
This method proves to be wildly popular with festival goers,
as this makes purchasing much more accessible to attendees
of all ages so they can pay for their tickets over time.
Coachella benefits because they're
able to secure attendees for their event
even before they announce the headliners, which happens
months after the event sale.
For Coachella 2019, advance passes for the first weekend
sold out in around 2 and 1/2 hours, which
was an hour faster than they did in 2018.
While not all events will be held on the Coachella scale,
we hope you see here that tragedies
like earlybird pricing creates a feeling of scarcity
and opportunity, which leads people to feel
more motivated to purchase.
Plus, you can get some numbers for your events early on.
For your own event, take the time
to think about who your target audiences are,
whether you can segment your pricing based
on what those groups are interested in paying,
and what a reasonable ticketing deal looks
like for your business after running the numbers.
There are a multitude of ways you can approach pricing
products or food, but the best and most beloved way
to implement dynamic pricing is with old-fashioned discount.
With sales, you can incentivize customers
to purchase products that are out
of season, to come visit your business during slower hours,
or to deem your products more valuable when discounted.
This can either be in the form of a limited time
frame for a sale online or in store,
or you can even create coupons that
are offered in a newsletter.
Starbucks is a great example with their popular Thursday
happy hour special, where customers
can do a buy one get one free of a drink sized grande or larger
between 2:00 and 7:00 PM.
During its happy hour period in October 2019,
Starbucks saw an 11% increase in foot traffic.
And during the most popular hour of their promotion at 6:00 PM,
traffic jumped over 15.6% over the pre-happy hour average.
Not only did this promotion help Starbucks increase sales
during their normally slower afternoon,
but it also had a larger impact of helping
attract 15.3 million new active members through its Starbucks
rewards program when it ran the happy hour in November 2018.
And I'm sure in the sales department
it was a happy hour for them.
You know what I'm saying?
Dynamic pricing as a strategy is pretty darn cool
once you get the grasp of how it actually works.
If you're looking for more resources
to determine what the best pricing
strategy for your business is, check out our resources section
below for our blog posts on other pricing
models and our free sales pricing strategy calculator.
For more understanding on how to set up
a competitive strategy for your business in general,
check out our free course too.
And that's a wrap.
Now, if you'll excuse me, I'm going to go hop in an Uber.
I'm not going anywhere, it's just $0.13,
and I'd like to take advantage of that.
I'll see you next time.
[MUSIC PLAYING]
Did I also-- nope, I didn't.
St-- I was about to say Star Wars.