Dynamic pricing in manufacturing industry

July 12, 2013 10:07 am

Dynamic pricing allows a business to maximise its profits. Vikas Khandekar writes about its importance in the in manufacturing industryDynamic pricing is a method of flexi pricing in which different customers pay different prices for the same product or service, depending on a variety of factors, including the timing of purchase. The manufacturer or the service provider changes the price of the product or service depending on a few factors. It is quite common among industries such as hospitality, transportation and airlines whose business increases or decreases greatly under predictable circumstances.Dynamic pricing allows a business to maximise its profits because it is better able to assign prices that take into account shifting levels of demand and willingness to pay. It has started becoming fairly common in manufacturing sector as well. However, it is limited to two main areas such as purchasing raw materials (like oil, metal ores, coal etc.) and retail sector where the end products are being sold at differential prices depending on season, day of the week, demand pattern, etc.Beneficiary of dynamic pricingThe first and obvious beneficiary is the manufacturer or the service provider, who is able to fetch more revenue per unit of produce in periods of higher demand. At the same time, when the demand is lower, the customer base is protected and retained through lowering of prices.
The consumer is an indirect beneficiary in the process. In case of higher demand, the consumer is able to retain or reserve the product or service for his consumption, albeit at a higher price. Similarly, the consumers gets the benefit of reduced prices and discounts when they extend the benefits of business continuity to the manufacturer through early booking of the goods and services or guaranteeing consumption during periods of lower demands. Challenges in implementing dynamic pricingDynamic pricing is most effective when an industry is able to accurately predict consistent changes in demand for a product or service. Dynamic pricing can be very difficult to implement when these changes are less predictable, or if it is easy for consumers to change their habits to take advantage of the product or service when the price is lower. It is difficult for a retail store to successfully implement dynamic pricing because it would be easy for consumers to adjust their shopping habits to avoid higher costs.
There are also questions about ethics with dynamic pricing. For example, one of the leading online selling websites received a bad press when it was found that it was resorting to customer profiling and buying patterns to alter the pricing parameters for specific products.
Third type of challenge for dynamic pricing in manufacturing sector is in its execution. Real-world experiences changes the controlling factors which in turn would enforce a dynamic alteration and publication of the pricing for the products. Such an event and response need an agile mechanism, which is possible only through electronic means; for example, when buying and selling are happening completely through Internet or other digital media. Although, quite a good volume of trade happens in India through electronic means, in percentage terms, the entire trading, buying and selling volume are out of bounds for agile dynamic pricing models to practically work out for the large populace.
For a manufacturer to be able to alter the prices and the pricing model dynamically in an agile mode, it would be inevitable to have the prices published through the electronic mode on the Internet. Also, the software maintaining and managing the pricing model must be architected in such a fashion that the alteration of the model does not involve high maintenance costs. For the consumers and buyers, there needs to be an easy access and a level of Internet literacy to be benefited from the dynamically changing prices and pricing models.

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