Dynamic Pricing vs. Real-Time pricing - explained in 3 questions
Yes, the world of pricing is big; but the world of data is even bigger. So, how can you find your way through data-based pricing without going down the rabbit hole? How do you avoid getting lost in the maze that dynamic pricing and, more precisely, real-time pricing, can sometimes be? If you are asking yourself this question - just know: we understand.
Thankfully, we recently had the chance to have a chat with one of the many brilliant minds among us to find the answers you need.
Meet Paul: our Chief Data Scientist here at Convious.
He has been working with data for almost 15 years now, and we used the opportunity to pick his brain and clarify possible confusion around dynamic pricing, real-time pricing, and the relationship between the two.
Paul, tell us, what has your experience with data been like so far?
"Where do I begin?
Well, probably my first professional face-to-face meeting with data was in 2006, working in academia doing Data Analysis about the globular star clusters.
Already sounds scientific enough or not?
All data sciences nowadays are very much related to academia. Most of the algorithms and methods have been invented and used for many years in academia, but now, with all the capabilities, those methods are applicable throughout many many industries.
So, my journey started over there in astrophysics.
Then I moved my career to online social products. Meaning products that were used by people online in one way or another; retail, ads, social networking, or chatting.
These were different products, but all used socially by people worldwide - people engaged with these products using different modes of interaction. The social aspect of my work was constant throughout my career and still is here at Convious.
This is what I do here, and I am excited to continue doing this."
There is a lot of technical and sometimes even confusing information out there. Can you explain the relationship between Dynamic Pricing and Real-Time pricing in your own words?
It’s a broad term, as you can see...
Basically, any price change that relates to the changes in demand or market conditions, in general, is called dynamic pricing.
There are many many forms that dynamic pricing can take; one of the simplest forms that I believe a lot of people have already been exposed to is seasonal sales. Every shop may sell different products, but they often share events such as autumn sale, or Christmas sale - those sales generate the demands, and usually, an influx is expected. As a result, they might put a different discount on different products, but they do not do that on regular days, let's say, on slow days or weeks. This is the simplest form of dynamic pricing that everyone has been exposed to and used to.
Want to know more about what Dynamic Pricing can do for you? Read it here
In real-time pricing, however, the price changes immediately, every single time a market changes. Markets can be defined by many many conditions - by the demand, the supply, the urgency, or even environmental factors. If it is possible for a system that controls the price to detect changes close to real-time - so, when a sale happens, when the rain starts to fall, when a particular event occurs, or a virus outbreak happens and drug stores run out of masks and increase the prices, then that system is driven by dynamic pricing.
This has been happening worldwide. It may not be real-time - but it is close enough. Although a real-time pricing system may not regulate it, it is an illustration to understand how such changes impact the selling rates.
So, real-time systems, such as Convious’, have a real-time data influx coming from various systems, and this data is then also processed in real-time to be able to make pricing decisions as soon as possible.
Now, we have touched two different ends of dynamic pricing systems, some really slow such as seasonal pricing and then real-time pricing at the other end of the spectrum - the purest form of dynamic pricing.
There are many many different forms, such as time-based pricing, segment-based pricing, or peak-pricing, and the most relevant one depends on the business niche and the product itself.
Airlines have different routes and seats. Cinemas have different time slots and seats. Uber has different journeys impacted by environmental factors. All forms have one thing in common: they react to the demand - the market.
The frequency of how often a price is updated also depends on many other factors. Certain products bring certain behavioural elements from the customer, and they also need to be taken into account when deciding on which type of dynamic pricing system to use."
What do you believe was the most surprising thing you learned from working with this unique way of processing and using data?
"That’s a good question!
There are many effects dynamic pricing has on certain venues. There is no single global rule that can tell you 'if you start using dynamic pricing, then this or that will happen.'
In every business vertical, in every market, the output can be slightly different. Dynamic pricing is very much linked to social behaviour. The effects, the benefits it brings, very much depend on how the people react to it because it is the customers that define the success or the failure.
For different businesses running on different markets, they have different effects and different customers, and in some cases, the possibilities are supermassive.
In some other cases, the dynamic pricing methods that are not as real-time but more predictable, such as weekly prices, work much much better than real-time updates.
And again, that is a result of the ability to be predictable and being predictable towards your customers, so they know what they can expect from you.
So it was surprising to know that in every case, dynamic pricing successfully solved the flat price problem, but the magnitudes, the success or uplift, was very different in different cases. If I was going to predict now what the uplift on revenue or sales of a new partner coming from a new business vertical will be, that would be hard to tell without understanding the people and their particular behaviour. Because the prices are being optimised not for business but for the users."
Real-life example? Take a look at how Disneyland, crowds and Dynamic pricing relate here.
There you have it!
Dynamic pricing has many faces and can deliver a variety of results. Real-time pricing adds to this variety by throwing more variables in the mix and updating prices more immediately and more tailored to each situation and venue.
Shortly put: whether it is dynamic pricing or real-time pricing, it will solve your static pricing problem.
How to pick the right pricing system that will help you to drive the results you wish for will be defined by your goals and your customers’ behaviour.