The What and How of Calculating Dynamic Pricing

July 29, 2019

The rise of the Internet and digital technologies have completely transformed the way that business is conducted around the world. Yet while we often think about things like same-day delivery or inventory that is substantially greater than any single physical store, the Internet has supercharged another tool that affects the way we transact online. 

That is dynamic pricing.

From purchasing a flight to getting into your last Uber ride, you likely have firsthand experience with dynamic pricing. What used to be just an idea has become an essential part of many services that all of us take for granted.

This is especially true in the food services industry. Dynamic pricing has become an increasingly important pricing tool. Companies like McDonald’s and Luckin Coffee have already started to implement dynamic pricing in their operations. Whether you just opened your food services establishment or have operated a restaurant for decades, it’s important to understand how to calculate dynamic pricing and why it is so valuable.

A Primer on Dynamic Pricing

As you likely know, dynamic pricing is relatively straightforward. At a high level, it is pricing for a product or service that is adjusted based on a group of rules or variables. As the facts or the situation on the ground changes, sophisticated algorithms match up this new set of facts against those same rules and variables, which eventually creates an updated price. Because this process is constantly occurring, customers could theoretically see hundreds of prices per day (or more).

Clearly, one of the key factors constituting dynamic pricing is the rules or variables that generate constantly changing prices. While the precise rule will depend on the sector or industry, most dynamic pricing models start with an overarching commercial objective (or objectives). 

In the restaurant industry, for instance, this can be something as simple as altering pricing depending on the hour or the number of people that are in your store. The general thought behind this would be that you can raise prices in times of peak demand and lower prices when demand is tapering off.  

With that goal in mind, you and your team can start calculating your pricing rules. In their most basic form, you can think of this in terms of if/then statements. With the example above, you can create a rule where prices are raised by a certain amount if a certain threshold of guests is standing in line. You can even do this on a more granular level, where certain plates get more expensive (or cheaper) depending on the number of guests in line. While some technologies can help you get that critical data point of the number of customers in line, you may also choose to use a proxy (like certain hours per day).

This is just one example, but the bottom line is that dynamic pricing is a direct result of facts on the ground and rules that you’ve created. AI and other increasingly sophisticated technologies can create even more complicated rules that can help you accomplish your pricing goals. With any type of dynamic system, however, testing is absolutely crucial. You and your colleagues need to continuously gather data, analyze it, and make any necessary changes to your dynamic pricing rules. 

The Power of Dynamic Pricing

Dynamic pricing is so valuable because it offers pricing in response to real-time data. In any type of marketplace, supply and demand are always shifting. Yet even though this reality has existed for countless years, merchants weren’t able to mechanically gather the data and adjust prices to accomplish their financial goals. 

The situation has drastically changed with dynamic pricing. Using today’s technology, you and your colleagues can create a system that can help you accomplish your sales goals. Whether you work in the food services industry or any other industry, dynamic pricing can be a game-changer—so long as it is implemented correctly.

The hypothetical above revealed some of the important things that you should think about when implementing dynamic pricing. Having clarity about your financial goals is absolutely critical. But beyond that, you’ll need to simply get started. With real-world data on how your rules are performing, you can quickly adjust your dynamic pricing model. Over time, you will create a stellar dynamic pricing system that works for you.

If you would like to learn more about dynamic pricing or how we can help you incorporate it into your business, feel free to contact us. We look forward to hearing from you.

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