To keep up with the market and competitive prices, businesses should consider dynamic pricing which utilizes variable prices instead of fixed prices. It enables selling the same product to different people for a customized price.

Why Dynamic Pricing?

There are several reasons to choose dynamic pricing. But we can categorize them as follows:

  1. Regular Price Changes
    The rise of eCommerce platforms/ online shopping, economic changes/ crisis, government rules, and regulation changes, or even weather has a direct impact on businesses and sales. With all these changes, if you sell products to everyone at the same price, you will lose many sales opportunities and even lead to profit loss.
  2. Price Transparency
    Before purchasing a product, the consumers tend to compare prices, read reviews, and look for product specifications or a product breakdown. This evaluation will lead to a price match and if your price for the same product is higher than the competitors there is a high chance of the customer choosing your competitor instead of you.
  3. Introducing New Products
    You may release new products to the market as required. To ensure that the newly released products get the attraction of the consumers, you may need to change the pricing as you go.

Now let’s see an example from the health insurance industry, an industry that highly demands price elasticity of their products.

Application of Dynamic Pricing Strategy in Health Insurance Premium

The following example shows how different variables are used to calculate the health insurance premium dynamically. In the following decision graph, you can clearly see how each decision such as base premium, price predictions, and situational charges are used for the final premium calculation.

We used FlexRule™ Advanced Decision Automation Suite which accommodates both rule-based/ prescriptive decisioning (predefined business rules) and data-driven/ predictive decisioning (data analytics/ machine learning) in one decision graph.

 

dynamic pricing

When the market prices change, you can easily use a predictive model which uses Machine Learning capabilities to analyze the current market price and adjust your price dynamically.

Furthermore, when there are unpredictable situations like COVID happens, still you can keep up with the market adjusting your product price accordingly. Here we used a prescriptive model which is a Decision Table to add charges accordingly to potential COVID vulnerabilities.

Furthermore, explainability of decisions is very important, especially when a complex project with many stakeholders contains several decisions and business rules.

  • Building trust with stockholders: The customers trust the systems more when the decisions are transparent and easy to understand how the decisions are made.
  • Regulatory reasons: Auditors and Regulators can easily monitor compliance.

The following event list after execution explains the events after running the model including the time it took to execute.

  1. The Discount decision which is a rule-based decisioning.
    It also shows the matched/ unmatched rules along with the conditions
  2. The baseline price calculation prediction which is a data-driven decision.

In this example of health insurance premium, imagine you ignored the market prices, situations such as COVID, and decided to have a fixed price while the competitors propose reduced prices. That will definitely lead to losing customers and profit over time.

Conclusion

The market is getting highly competitive and challenging with new product releases and having to face economic challenges. While it is important to have new customers, organizations need to keep the current customers too. So, you must keep evaluating whether you are giving the best price you can.

These are the major advantages of implementing Dynamic Pricing Strategy:

  • Stay on top of the competition
    It helps to match the prices with the competitors and ensure you can beat their prices
  • Insights on customer and market behavior
    Use machine learning techniques to analyze customer and market data
  • Profit Boost

Once you have a better idea of the competitors, market, and customers, it opens up more opportunities. You can calculate the price dynamically and offer the customers what they want.

The usual methods for calculating the price are the cost-plus method, the competitor-based method, and the value-based method. FlexRule allows you to combine all the methods using rule-based and data-driven technologies and calculate the dynamic price faster. This ensures a better price in a timely manner helping your organization to boost sales and maximize profit.

Published March 24th, 2022 at 01:33 pm