What Is Dynamic Pricing? How It Works with Examples

What Is Dynamic Pricing
Photo Credit: Food Navigator

Dynamic pricing is a pricing strategy in which prices change instead of being set. The main idea behind the dynamic pricing system is to offer the same product to different groups of customers at different prices. Let’s have a look at some examples of Airbnb(‘s) dynamic pricing for a better understanding and explanation.

What Is Dynamic Pricing

Dynamic pricing(DP), also known as surge pricing, demand pricing, or time-based pricing, is a pricing technique in which companies set variable prices for goods or services based on the demands of the market at a given time. Businesses can change their prices based on algorithms that take into account the prices of their competitors, supply and demand, and other factors in the market.

Several sectors, including hospitality, tourism, entertainment, retail, electricity, and public transportation, often use demand pricing. Based on its unique requirements and the demand for the product, each industry adopts a somewhat different approach to DP.

In a largely technologically based pricing system called “dynamic pricing,” prices are adjusted for various clients based on their willingness to pay.

What Factors Affect Dynamic Pricing

You probably considered things like the periods and your competition when deciding on a leasing price, but dynamic pricing adjusts the price based on a variety of crucial characteristics and data points.

#1. Seasonality

A DP solution will do this, exactly like you would change your price depending on the seasons. To make that pricing in the peak seasons as profitable as possible, it does so in concert with the other elements listed above.

#2. Time of the Week

Your charges on weekdays will probably be higher if your location draws business travelers. On the other hand, your holidays will certainly be the more expensive days if your rental draws more tourists.

#3. Input and Output

If there is little demand for properties in your sector or location, your pricing tool will reduce your price to draw in more visitors. Conversely, if prices increase, it will cause your prices to increase, allowing you to earn a little extra money.

#4. Local Activities

The pricing system will probably advise you to increase your nightly rate if major events are taking place nearby, so you can profit from the extra money these exceptional occasions generate.

#5. Days Remaining till Reservation

The pricing system will suggest reduced rates to entice last-minute visitors when you have available last-minute access, but bookings that are farther off will be more expensive.

#6. Listing Performance in the Past

The DP function also considers how well your rental has performed over time.

#7. Vacancy Among Rivals

The demand pricing function also keeps track of what’s going on with your competitors’ rentals.

#8. Comparable Costs

You undoubtedly took competition rates into consideration when manually altering your rate. This is what demand pricing technologies do, but they also continuously modify your price as necessary.

#9. Amenities

The demand pricing system also takes into account the various facilities that your rental offers. These have an effect on the price that your tool will suggest.

#10. Reviews

You can demand more if your lease has many positive reviews. The demand pricing system charges proportionately.

Benefits of Dynamic Pricing

We will outline some benefits that using demand pricing can offer your company so you can better comprehend the advantages of doing so.

#1. To Maximize Profits

Dynamic pricing makes it easy to keep track of a product’s best price while also keeping an eye on how similar product prices vary. This provides you with a unique perspective that allows you to follow the crowd and generate more money without fear of losing market share. When prices fall as a result of a price shift, you may choose to increase the number of transaction conversions and profit by volume.

#2. Recognizing Customer Behavior

Dynamic pricing also aids in identifying and resolving crucial customer behavior concerns, such as the most effective forms of advertising and the most popular products at any given time.

#3. Comparison of Automation

Demand pricing is a technique for a firm to instantly retain pace with the competition, enabling it to prepare for threats or grab opportunities. It also enables more competitive rates in comparison to the competition. In order to develop compelling differentiators for your business, it can also be helpful to observe competitors.

#4. Pricing Dynamic Implementation

It is possible to develop a tool to assess prices at the required frequency in accordance with the company’s standards using sales metrics and pricing data. It is advised that the information be organized using a data lake.

The disadvantages of Dynamic Pricing

Businesses that use dynamic pricing, which adjusts prices in response to customer demand in an effort to increase sales, run the risk of suffering from a number of drawbacks, including:

#1. Affected Clients

Demand pricing may have the unfavorable effect of infuriating or even upsetting customers who find out they were the target of price discrimination. For instance, if airline passengers compare the cost of their tickets, one passenger may learn that he spent twice as much as another. Customers could feel tricked or duped as a result of this.

#2. Client Loyalty Is Declining

Dynamic pricing can harm a firm’s brand loyalty if it makes customers irritated or furious. When a company has earned a customer’s trust, they are more likely to buy from them again and again, rather than shopping around and searching for lower prices elsewhere. Customers are more likely to shop around for goods and services from other businesses if they are aware that a company uses demand pricing, as it encourages them to make sure they are not being overcharged.

#3. Higher Competition

When consumers are not devoted to a specific business, they will go anywhere they can find the best discounts. Online buyers may rapidly compare costs for the same goods and services at various vendors. Due to its dynamic pricing strategies, one corporation may compel rivals to cut their prices in an effort to compete if it offers a commodity lower than others. The bargaining down of goods prices and reduced profit margins that can result from more competition is bad for corporations but beneficial to customers.

Dynamic Pricing Examples

Ride-sharing services, airlines, B&Bs, and motels, as well as e-commerce businesses, are some of the most popular examples of dynamic pricing.

#1. Services for Sharing Rides

Uber and Lyft are just two examples of ride-sharing services that frequently use demand pricing. In this sector, rush hour and weather-related situations like snow, rain, or storms determine rates (surge pricing) to reap additional gains.

#2. Airlines

While many people can typically book their tickets a few months in advance, business travelers frequently need to make last-minute flight reservations. As a result, airline ticket prices might alter within minutes.

#3. Hotels and B&Bs

Seasons, various celebrations, events, and other noteworthy days of the year all affect how much B&Bs and motels cost. Demand pricing will assist this company to increase its profits.

#4. Internet shops

Many online retailers change their prices in response to various external and internal variables, such as the release of new designs or the start of the outlet season. These impacts include the sale price, seasonal, adversarial, and organizational activities.

Dynamic Pricing Airbnb

Simply said, dynamic pricing Airbnb simply adjusts the pricing of your Airbnb property in response to changes in both the demand and supply for Airbnb space in your market.

Although frequently referred to as “dynamic pricing” Airbnb tools, these solutions can also automate and improve your price on prominent vacation rental PMS platforms like Vrbo, Booking.com, and Tripadvisor.

With dynamic Airbnb pricing, you can set your prices automatically instead of spending a lot of time testing prices and keeping an eye on the prices of your competitors, the seasons, and events. You may, of course, use Airbnb’s built-in demand pricing feature, but one issue with doing so is that Airbnb has the incentive to charge visitors the smallest amount possible.

Airbnb will be less interested in obtaining from you, the owner or property manager, the highest nightly fee as opposed to a paid dynamic pricing service (which shows its value by your revenues).

What Is the Dynamic Pricing Model?

The dynamic pricing model offers useful perceptions of how pricing systems work. The demand response to price changes must be determined in order to use a dynamic pricing model.

When Should Dynamic Pricing Be Used?

If competitors are selling goods or services for substantially more money, then a dynamic pricing strategy should be used to enhance earnings. 

What Are the 5 Types of Dynamic Pricing?

  • Pricing determined by groupings.
  • Time-based pricing
  • Pricing at cost plus
  • Pricing influenced by rivals.
  • Pricing according to value.

Why Is Dynamic Pricing Important?

Dynamic pricing is important because it increases sales and brings in a lot of money. It is a real-time pricing method that can also assist in determining a flexible cost for the good or service.


Dynamic pricing is a way to set the price of a good or service based on how the market is doing. If properly applied, demand pricing is a crucial strategy that can yield significant benefits. The key lesson here is that demand pricing only functions well when it is correctly designed.

Demand pricing encourages a great deal of inventiveness while aiding in the indirect regulation of numerous sales-related factors. Using big data and machine learning, there are an infinite number of methods to leverage data to affect prices.

What Is Dynamic Pricing FAQs

Is Dynamic Pricing Good or Bad?

Dynamic pricing has its merits and demerits, the good and also the bad side of it, considering some of its features that can either improve business or cause a setback.

What Are Dynamic Pricing Tools?

The dynamic pricing tools include the following:

  • Pricelabs
  • DPGO
  • Wheelhouse
  • Beyond Pricing
  • AirDNA Smart Rates

What are the Dynamic Pricing Examples?

Ride-sharing services, airlines, B&Bs, and motels, as well as e-commerce businesses, are some of the most popular examples of dynamic pricing.

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