Dynamic pricing

What it means

Dynamic pricing is a strategy in which the price changes continuously according to current conditions: demand, time of day, day of the week, stock levels, competitors’ prices or customer behaviour. Typical examples are airline tickets, hotels, ride-hailing and stores on large marketplaces, where software adjusts prices several times a day.

The aim is to sell more when demand is low and earn more when it is high. It works best where capacity cannot be stored, such as an empty airline seat or hotel room, and where customers have different price sensitivity depending on when and how they buy.

Dynamic pricing should be distinguished from personalised pricing, where each customer sees a different price based on their profile. That is subject to stricter rules, and the trader must tell the customer that the price was personalised on the basis of automated decision-making.

How it works in practice

For smaller companies dynamic pricing starts simply: seasonal prices, discounts on slow-moving stock, higher prices for express delivery or early-bird purchases. Software tools pay off only with a large range where manual adjustment is impossible.

On margin it is important to watch not only revenue but whether automatic price cuts in a battle with competitors fall below the profitability threshold. We recommend setting a floor price that covers direct costs and a reasonable contribution to overheads.

When selling to consumers, the rules on displaying prices must be respected. Under the Omnibus Directive, when announcing a discount the trader must also show the lowest price of the last 30 days, which with frequently changing prices requires the system to keep a price history.

What to watch out for

The biggest risk is losing customers’ trust. If they find out they paid much more than others for the same product, or that the price rose just when they needed it most, they may move to a competitor, and with consumers it can also lead to complaints of an unfair commercial practice.

The second risk is a battle of algorithms. When several sellers let their prices react to each other automatically, they can spiral into needless price cuts or, conversely, into coordinated increases that may attract the competition authority. Configuring the algorithm is the company’s responsibility, not the software’s.