Pricing – get it wrong and the growth and profitability you visualized for your business will quickly become yesterday’s pipe dream. Get it right and your company will thrive – enabling you to exceed expectations and boost revenue. This is where the flexibility of dynamic pricing comes into play.
Today’s market landscape is constantly evolving, and customer expectations have reached an all-time high. Gone are the days of offering a single pricing model such as flat-rate pricing. Today, pricing needs to be flexible, adjust in real-time, align with the value of your offerings, and even be personalized.
So, what are the benefits and disadvantages of dynamic pricing? Furthermore, how do you know if dynamic pricing is right for your organization and what does it take to implement this strategy?
What is Dynamic Pricing?
The dynamic pricing strategy was first introduced by the airline industry in the 1970’s. Today, dynamic pricing is used by a variety of industries, including hospitality, eCommerce, ride sharing, entertainment, and even some automobile companies like Tesla.
Dynamic pricing is a monetization strategy where the price fluctuates based on a variety of variables such as market demand, the season, supply increases/decreases, and price bounding. Think spring break… where airlines, hotels, Airbnb’s, car rental agencies, restaurants, etc. increase their prices throughout the season. These companies raise their prices because demand is high, supply is low, and customers will pay more to get what they want. Simply put, when there is an increase in demand for a product or service, companies can raise their prices – maximizing revenue.
How does this pricing scheme affect the software-as-a-service (SaaS) industry?
Let’s Talk About the SaaS Industry
Like other business models, dynamic pricing enables SaaS organizations to refine their pricing by considering factors like customer demand, competitor pricing and market trends. Dynamic pricing models allow SaaS businesses to easily modify prices based on a number of variables. These include fluctuating market conditions, customer segmentation, seasonal fluctuations and time-sensitive promotions.
Not a one-size-fits-all, dynamic pricing offers a variety of pricing strategies, with the most common being:
- Competitor-based pricing: Highly influenced by competitor pricing, this pricing model is often used by SaaS companies that sell similar products and services to that of their competition.
- Demand-based pricing: This pricing strategy heavily relies on fluctuations in customer demand and pricing is adjusted accordingly – high demand-higher prices, low demand-lower prices.
- Event-based pricing: Leverages three components – perceived value, the actual price, and cost per event ticket to adjust pricing for maximum profitability.
- Segment-based pricing: The broader target audience is subdivided into different groups based on demographics or other characteristics or properties. Customer prices vary based on what the segment is willing to pay.
- Time-based pricing: Leverages various factors such as time of day, day of the week, or the season, linking prices to a particular time, day or season.
- Value-based pricing: A customer-focused pricing strategy, it aligns prices with the customer’s perceived value of the product or service.
Dynamic Pricing: Highlights and Lowlights
A flexible pricing strategy that’s focused on maximizing revenue and gaining competitive advantage, dynamic pricing delivers a variety of advantages (as well as some disadvantages).
What are the benefits of dynamic pricing for SaaS organizations?
- Maximizes revenue and profitability by adjusting pricing to align with market demand.
- Provides overall greater pricing control.
- Enables pricing flexibility without compromising brand value, and in some cases even strengthens brand value.
- Provides data on pricing trends, competitor behavior, customer preferences, etc. SaaS companies can then use these insights to personalize offers and create targeted marketing campaigns.
- Enhances customer satisfaction and retention by providing lower prices during off-peak periods.
What are the drawbacks of dynamic pricing for SaaS organizations?
- Customers may find price changes unfair, inconsistent, or unpredictable.
- An increase in churn may occur if customers discover that others are paying a lower price for the same product or service.
- Given that the success of this pricing strategy relies on price adjustments, it has the potential to be time consuming for the business.
- Excessive price hikes during peak demand periods may result in lack of trust.
- If prices are continuously lowered, SaaS companies run the risk of starting a price war which will ultimately affect profitability.
While these disadvantages can have repercussions, SaaS businesses can minimize customer backlash by being transparent about their pricing strategies, communicate the value of dynamic pricing, and offer discounts to loyal customers.
Is a Dynamic Pricing Strategy Right for Your SaaS Business?
While dynamic pricing offers the ability to improve revenue and profitability, this pricing strategy isn’t for all industries or businesses.
- Can your SaaS business determine when and how demand for your product or service shifts?
- Will your customers accept prices that vary?
- Is your company a market leader or strong player in the industry?
- Do some of your competitors use dynamic pricing?
If the answer to the majority of these questions is yes, here’s a few other considerations.
Review your company’s short- and long-term objectives? For example, what is your current pricing model; what are the advantages and disadvantages of your current pricing strategy; do you want to increase the volume of sales or improve your profitability; what are your customers’ pricing expectations? Answers to the above questions will give you the information needed to determine if dynamic pricing will help the company attain its goals.
What it Takes to Implement Dynamic Pricing
By adding dynamic pricing to the mix, you’ll automate changes in pricing methods and amounts in real-time – providing a powerful new dimension to your monetization strategy. It provides more control over your prices, enabling you to adjust prices to meet market demand almost instantaneously. However, as with all pricing strategies, realizing its full potential requires time and effort. This is where the following best practices and tactics will help put your SaaS company on the road to dynamic pricing success.
- Know your customer segments and their personas. This will enable you to tailor your pricing to meet their needs.
- Use the right value metrics. For example, if your business offers cloud storage charging on a per GB would be appropriate. Alternatively, if you’re about to launch a new software release, using time-based pricing will help boost interest and profitability.
- While overcompensating with discounts, promotions, coupons, etc. can have a negative effect, they are extremely beneficial in offering competitive pricing.
Dynamic pricing has a level of complexity not found in out pricing strategies, however when implemented right the benefits far outweigh the disadvantages.
Drive Profitability with a Dynamic Pricing Strategy
With a flexible pricing model, you’re able to gain agility, reduce the time to launch new products, and support evolving customer needs. Dynamic pricing provides the ability to adjust the price of a product or service in real time. This way SaaS organizations can meet market demand, increase revenue, manage inventory more effectively and enhance customer satisfaction.
BillingPlatform delivers the power of dynamic pricing, enabling SaaS businesses to offer diverse products and services that can live and breathe within today’s evolving business ecosystem. Our underlying metadata platform, as well as the ability to define specific product and account elements used in formula-based rates or matrix-style pricing provides the rating and monetization intelligence needed to quickly deploy a dynamic pricing strategy. If you want to maximize your dynamic pricing strategy, reach out to our experts today.
