Table of Contents Hide
- What is Demand Based Pricing?
- Forecasting Demand: A Guide
- How to use demand based pricing?
- Demand Based Pricing Methods
- Examples of Demand Based Pricing
- Pros and Cons of Demand-Based Pricing
- Demand Based Pricing Strategy
- When is demand-based pricing not the Right Strategy?
- When do I use Demand based pricing?
Demand based pricing determines the actual demand for a product based on current market conditions, making it one of the wholesale pricing strategies used to maximize return on investment.
This kind of wholesale pricing, sometimes referred to as surge pricing or time-based pricing, is based on the notion that customer acceptance defines the true value of a goods or service on any particular day.
This article would talk about demand based pricing methods, strategies, pros and cons, even down to setting some examples so you fully understand what this term means in your entrepreneurial journey.
What is Demand Based Pricing?
Using a plethora of data sources, such as previous sales data, to project future customer demand for a good or service, demand based pricing is a comprehensive approach to pricing that may incorporate several tactics. What they all have in common is consumer demand.
When previous sales information is available, demand forecasting entails a thorough examination of prior sales patterns. Metrics can be created in the absence of historical data using market research, expert opinions, and a comprehensive examination of the precise factors that influence demand for a given product.
Forecasting Demand: A Guide
To create a demand forecast, accurate data is needed. You can start by gathering as much precise information as you can on your individual product. You should also gain information about other items that might give you useful commercial insights.
Focus on an individual product rather than a product line whenever you can because doing so helps you see new trends and possibilities to improve your wholesale pricing methods.
Also, examine what your competitors are doing, especially if they consist of successful, high-performing companies. However, keep in mind that your lead time is a crucial component of any effective demand forecasting model.
How to use demand based pricing?
The following steps are what you should take to develop a target-based dynamic pricing system.
- Decide on a volume goal that you wish to reach
- Check sales every day against a target
- Adjust price dynamically to approach a target
- Reevaluate the pricing every day
- Price adjustments should be made till you attain your goal at the highest potential revenue
However, it is crucial to consider additional elements that could affect consumer behavior and perception when predicting demand scenarios in periods of turbulence in demand.
Demand Based Pricing Methods
There are 3 main demand-based pricing methods:
- Price Skimming: A vendor who employs this tactic launches a product with a high price and then steadily reduces it over time. The goal is to first attract the more affluent customers and early adopters who will help the business recoup its costs for research and development, government compliance, etc before gradually lowering the price to win over a larger portion of the market.
- Price Stagnation: This is very opposite of the former. With this pricing method, the initial pricing is maintained incredibly low to draw in more clients and broaden the market.
- Yield Management: This is a valuable price discrimination approach that enables the suppliers of fixed and perishable services to offer the right products, to the right clients, at the right pricing, and at the right time.
Examples of Demand Based Pricing
One of the best examples of demand based pricing is one that the airline sector provides us using the yield management pricing strategy. The cost of airline tickets may have fluctuated sometimes over during the year.
These variations primarily depend on the season, the flow of travel, or time of year. High demand inevitably results in very high prices. However, costs unexpectedly drop significantly during seasons when clients don’t travel as much.
The release of iPhones is another instance of demand based pricing in action. Apple capitalizes on the initial buzz by pricing each new model unreasonably expensive.
As many people feel that owning the most recent model is essential, they are prepared to pay a hefty price for it. However, as time goes on and new models are released, the value of older models declines, and the cost of those model rises. The price of the product is ultimately determined by consumer demand and the value they place n it.
Yet another demand based pricing example is that of flat-panel televisions. These originally cost many times what they do on average today, making them only accessible to the wealthy.
Flat-panel TVs are now more widely available thanks to price reductions made possible over time by the manufacturers.
Pros and Cons of Demand-Based Pricing
#1. You can improve how you generate revenue with its aid
Demand based pricing is designed to make the most of consumer demand as much as workable. You may put your company in a strong position to maximize revenue if you can develop a plan that efficiently capitalizes on the demand for your good or service, no matter where it may be.
#2. By guaranteeing access to fixed inventory, specific techniques can provide customer service
This point relates to yield management. You essentially keep some access to a time-bound product’s fixed inventory by changing prices as the end of the product’s window of availability approaches.
There will still be some of that stuff available for last-minute customers, even if the remaining pieces will cost more.
#1. It may need a lot of labor
Demand based pricing is never fully understandable. In most circumstances, developing one of these techniques requires extensive research, plenty of trial and error, and no mere hunches or educated guesses.
All of that is difficult. It’s a time-consuming, frequently stressful process. So, if you’re not willing to put in the effort t d it well, you might be better off sticking with a simpler pricing strategy.
#2. It is notoriously picky
Demand may be unpredictable and difficult to forecast. There is no assurance that demand will behave as you expect it to, although your approach is supported by significant market research.
Trial and error, as indicated, are crucial but even the information you gather from it may not be trustworthy.
Demand Based Pricing Strategy
Demand-based pricing can take many shapes to meet various corporate demands and market positions. It will take some time and thinking to identify the strategy that will work the best for your business.
No matter the form of your organization, you may succeed by comprehending the underlying ideas behind demand-based pricing.
Some of the strategies include:
- Price skimming: A high price is initially established to boost the product’s worth, and then it is gradually lowered to expand the market.
- Price discrimination: Here, it set prices depending on market demand. For comparable products, various markets and buyers charge different prices.
- Penetration pricing prices are first made low in order to grow the customer base or attract new clients. The price steadily rises after establishing a clientele.
When is demand-based pricing not the Right Strategy?
Because demand based pricing is a form of dynamic pricing that specifically responds to demand, where the price of a given product fluctuates to reflect changes in the market through a defined logic or derived algorithm.
It is not appropriate for all industries especially if your business is about:
- Products that are simple to stockpile: Customers are likely to purchase large quantities of one item when the price is low and are more likelier to purchase the product when the price goes up again.
- Products that are easily comparable and traceable: Unless your customers sense additional value in your product, they may just choose to buy elsewhere if they can easily see that they can get it cheaper there.
- Using a subscription model for your products: Customers like subscriptions because they offer cost predictability, customisation based on references, and loyalty incentives all of which are typically incompatible with demand based pricing. Also, contractual commitments frequently eliminate the possibility of frequent price changes.
When do I use Demand based pricing?
Demand-based pricing works best for businesses that:
- Stock that expires soon
- Various payment levels Fixed capacity
- Periodic demand
- Differing degrees of urgency
- Online price
- Mainly fixed costs
This general overview of demand based pricing goes to show that it focuses on appealing to consumer demand. Although the strategy might differ depending on several variables, it also depends on how and when a company enters its market.
Those who are authentic innovators won’t use the same approach as those who create inexpensive alternatives.