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Dynamic pricing: Maximized profitability in real-time

Artificial intelligence allows companies to adapt prices based on market conditions and real-time demand.

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Quantumrun Foresight
December 19, 2023

Insight summary

In the B2B sector, dynamic pricing, also known as surge, demand, or time-based pricing, is becoming increasingly prevalent, driven by advanced analytics and e-commerce growth. It's crucial in industries with thin margins, like industrial distribution, or higher margins like manufacturing. Dynamic pricing strategies require careful monitoring of market conditions and demand, and are optimized through AI-driven models. While it offers benefits like enhanced revenue maximization and efficient promotional planning, it faces criticism for potential price gouging and exacerbating social inequalities.

Dynamic pricing context

Establishing the appropriate pricing has traditionally exerted a greater influence on profits than lowering selling expenses or increasing output. This practice is particularly true when the largest industrial distributors typically operate on razor-thin margins of just 1 percent. In contrast, manufacturers may earn up to 10 times more, according to the sales calculator Qymatix.

Shifting from a fixed pricing strategy necessitates attentiveness to fluctuations in market conditions, competition, and demand, and utilizing that information to arrive at optimal pricing decisions. For companies that have a small, homogeneous clientele and long product life cycles, the need for price adjustments may be infrequent. Conversely, companies with a wide-ranging and diverse customer base, multiple distribution channels, and shorter product life cycles require more frequent and precise price changes.

In both scenarios, implementing AI-driven dynamic pricing enables the organization to gain greater control and confidence in its pricing strategy. However, while dynamic pricing has gained popularity, it is not without its critics. Some argue that it can lead to price gouging, which occurs when sellers unfairly raise the prices of goods, services, or commodities to excessive levels.

Disruptive impact

According to consultancy firm BCG, businesses operating under list-and-discount pricing models in the B2B space can leverage dynamic pricing to determine optimal list prices that account for market conditions, competition, product features, and cost. Industries such as technology, software, and telecommunications rely heavily on subscription-based business models and contract-based or deal-based pricing structures. They increasingly use dynamic pricing to optimize their invoice pricing and discretionary discounts. Distributors and B2B retailers can also utilize dynamic pricing methods to enhance their promotional planning by predicting the impact in advance.

B2B businesses with a sizable customer base and operating in markets that justify a yield management strategy can use dynamic pricing to precisely match demand and customers' willingness to pay at an incredibly detailed level down to individual segments. These companies can make real-time pricing decisions that maximize revenue by using algorithms. B2B e-commerce platforms also utilize efficient auction management tools to optimize pricing, accounting for real-time demand.

Nonetheless, it is essential for companies to not over-rely on automated pricing but to stay in control. The effectiveness of dynamic pricing ultimately relies on the proficiency of individuals in managing the process. The sales and marketing departments offer their market expertise and human touch to pricing, complemented by the technical knowledge of the data science team.

Implications of dynamic pricing

Wider implications of dynamic pricing may include:

Dynamic pricing worsening existing social inequalities by creating price discrimination based on location, income, or race. This practice could lead to some groups paying more for the same goods or services, potentially leading to social unrest or public backlash against businesses that use this pricing model.
Price instability in the market leading to higher prices for certain goods and services.
Dynamic pricing being subject to government regulation, particularly if it is seen as unfairly targeting certain groups of people or undermining competition in the market.
A potential technological divide between businesses that can afford to invest in these tools and those that cannot, potentially leading to a consolidation of power among larger firms.
Changes in the labor market, particularly for workers who are paid based on commission or tips. If the price of goods and services fluctuates frequently, it could make it harder for these workers to earn a steady income.
Dynamic pricing creating environmental challenges if it encourages people to consume more of certain goods or services. For example, it could result in more air travel and higher carbon emissions.
The erosion of consumer trust if people feel like they are being taken advantage of or perceive that businesses are being dishonest about their pricing practices.