Imagine that it’s winter time and you go to the sale rack at the clothing store. There are a ton of bathing suits marked down. This is an example of demand driven pricing. It’s a method that considers fluctuations in customer demand and adjusts prices to fit changes in perceived value of items/services. Let’s think about what goes into the price of an item or service. Looking at an item we have to think about factors, such as manufacturing costs, market, competition and quality. Taking these factors into consideration allows for demand driven pricing tactics as long as the brand is covering their costs to manufacture their product with some profit left on top. There are a few different demand driven pricing tactics to discuss.
1. Psychological pricing: as the name sounds, this method involves psychology of using certain prices that have a psychological impact. The theory states that prices set at odd pricing, such as $9.99 drives demand more than it would if the number were whole.
2. Penetration pricing: this method is the opposite of price skimming and sets the initial price below average. This will attract a larger pool of customers at the beginning and is used with brands entering a very competitive market place. It can create traction for new brands through brand awareness. This is a long-term strategy to increase sale volume but can be difficult to raise pricing later due to consumer expectations.
3. Value-based pricing: this method uses the customer’s perceived value to set pricing rather than historical pricing of the product. This is where products tap into emotional purchasing. For example, in fashion or niche markets where consumers buy for social proof. Therefore, these prices are typically set high compared to manufacturing costs.
4. Price skimming: this method is where the brand initially sets the price of an item/service higher and will lower it as time goes on. Usually people are willing to pay more initially for a product launch and it will attract high end customers at first. As the pricing is adjusted, it will attract a more price sensitive audience. This will also help the company recover costs quickly.
5. Yield management: this method involves a strategy to sell a fixed-inventory resource within a limited time frame to match pricing fluctuations of customer demand. A good example of this is when airlines increase pricing closer to the holidays. Hotels will do the same. This is in order to cut their inventory costs in most situations and manage it efficiently. If demand is high then pricing will be high. If demand is low then pricing will be low.
6. Geo-based pricing: again, as the name implies, this pricing model relies on geographic location to set the pricing. This is typically used by brands that have a global market. Pricing changes based on location due to reasons such as local economy. For example, a product will be marked at a higher price in NYC than it would in Mobile, Alabama.
There are definitely some pros and cons to demand driven pricing. It can help maximize revenue and it can better serve audience through ensuring access to fixed inventory. However, it can be labor intensive and extremely volatile. There’s no guarantee that consumers will pay and it can be tough to predict. It will take thought out strategy to implement if your brand is interested in using demand driven pricing tactics. That being said, it will pay off through immense data collection to understand competitor pricing and market value.
