What is Dynamic Pricing? How does Uber set its prices?

Have you ever wondered why Uber is like $0.13 sometimes and $7 million other times? Literally takes your firstborn child? Or why the hotel rooms you wanted to book for your Cancun spring break trip did not seem like they were normal market price what's going on? Two words for you. Dynamic Pricing. What's up? It's Jamal from HubSpot, and in this video I'm going to break down the basics of dynamic pricing, a common pricing strategy used in tons of industries today. As always, if you find this content valuable, make sure to give this video a like and subscribe to the HubSpot YouTube chann. Now, let's start at the beginning. What the heck is dynamic pricing and why does it sound kind of exciting, like some kind of Wall street thing? Is Jordan Belfort involved? As wild as it sounds, it's a pretty intuitive concept. Dynamic pricing, also known as surge pricing, demand pricing, or time based pricing, is a pricing strategy where businesses adjust the prices of their offerings to account for change of demand. Think about all those times you try to book your seat on a flight and the price of your ticket changed based on how many seats were left on the plane, whether you opted for that extra legroom in the emergency aisle, or whether you were booking your flight further in advance. At the core of every pricing strategy is one thing. Profit and dynamic pricing is no different. This strategy aims to maximize profit based on time based opportunity, and there's basically an art to how the price offered to customers is calculated to match what customers are actually willing to pay for what they're selling at that moment. In other words, that's why you end up seeing multiple price points for the same thing. Dynamic pricing is the strategy of choice for these industries. To list a hospitality, transportation, airlines and ride sharing, gas and electric companies, retail and E commerce, event ticketing, and real estate. Some of the core factors that play into how price is determined are supply and demand value, market trends, seasonality, and time of year. Competitor Pricing let's put things into perspective with Uber. You're calling up an Uber on a Friday summer evening for a night out on the town with your friends. The minute you request a ride on the app, Uber's dynamic pricing algorithm kicks in to calculate your final price based on variables. They set the time you're calling, your ride, distance of your route, how much traffic there is on the road, and the current rider to driver demand. Now, if you're calling on a summer evening and you're in a popular city, chances are that there are a bunch of other people also pressing rides at the same time as you. This means that there's an increase in demand and thus higher need for supply of drivers. Because Uber wants to make sure that there will be enough drivers or some supply, their algorithm increases the price of a ride to what is known as the surge price. The app then notifies users that they are now seeing a search price as well as lets drivers know that the Uber fare increased so that they are incentivized to head to that area. With this method, Uber is giving riders two options. Either pay the higher price for a ride or wait a few minutes to see if the rates go back down once there's less demand. In both scenarios, Uber benefits since they are getting users to pay a higher price for a more valuable ride, or they're able to manage the amount of demand they're seeing by having users wait for a cheaper ride. Uber I see what you're doing. So you can see that dynamic pricing can really work in a business's favor because it's centered on so many factors that are expected to fluctuate, like how more people tend to go out on the weekends. But with great power comes great pricing differences. So here are the pros and cons of this pricing strategy that you should consider. Some pros of dynamic pricing are that first, employees can be paid a higher wage during busier times. With dynamic pricing, you have the flexibility to reward and incentivize your employees during busier stretches. Think about how some Uber drivers choose to drive during surge price hours so they can make more money in less time. Second, dynamic pricing allows you to still sell in downtimes. Even when demand is lowered, you'll still be able to get those sales. There will always be times when people just are less inclined to buy whatever it is you're offering. So leveraging this pricing strategy is great for still having some business whenever this happens. Plus, some customers may actually become more interested in purchasing when they see that your prices are lower than usual. Now, for some cons, the major con is that with dynamic pricing, you run the risk that customers might feel cheated and trust you less. I mean, it makes sense. People do like consistency. And I can tell you how mad I got when I saw the shirt I bought a week ago is now a whole $10 cheaper than what I paid for it. Oh, they scared me. So if customers see what they think is a fair price on your product or service one day and see it offered at a better price the next, they might feel like you're being too opportunistic or flat out unfair. And if you overdo changing your prices, you run the risk of losing precious business. Oh, that shirt. This goes to show that dynamic pricing is not a pricing strategy that can be applied to all industries, but when it's done right, you can see great returns. Speaking of great returns, if you want to skill up in any aspect of your business or professional development, we've got you covered with hours of HubSpot Academy content, all designed to accelerate you and your business growth. Check it out in the description below. Now, as an easy way to consider if you should use a dynamic pricing strategy for your business, here are three boxes you should see if your business checks off. 1. Your business has the capacity to gauge how and when demand shifts. To see if this point applies to your business, try coming up with some factors that fluctuate for you on a regular basis. In retail, stock and seasonal trends can dictate purchase behavior. For example, in hospitality tourism, spikes, room availability and nearby events are worth considering. 2. Your business has a customer base that is willing to pay non static prices. If your customers aren't the type that expect fluctuating prices for your service or product, then they probably won't be happy to see it happening. A dynamic pricing model wouldn't be the best fit for cleaning or moving, for example, because if word gets out that one customer got a better price for the same exact service, it's not the best look for your business. A good rule of thumb for determining if your customers are willing to pay non static prices is to ask yourself whether customers have a general idea of what they should be paying for it. And if possible, you can also run some tests on your own to see if customers are accepting any slight price changes and analyze the impact. 3. Your business has sufficient market power when setting prices or industry peers are also doing the same. In order for customers to accept the prices you're offering, your business will definitely need to have some street cred or weight in your industry, or else customers could view your services as less legitimate than other companies. Uber truly was one of the leaders in the rideshare movement and now they're one of the most established names in the industry and as a result they are one of the companies that users turn to to see if prices are standard or not. If your business checks all three of these boxes, consider trying out these dynamic pricing for two different scenarios. The first way is pricing for an event. If you're selling tickets for a webinar conference or any other live event, you can offer varying prices based on how close to the event date you are what times or days are expected to be more popular and the tiers of tickets you're offering. Coachella is known for holding an advanced ticket sale, which is the buyer's only opportunity to take advantage of the Coachella payment plan that allows attendees to pay for their ticket on an installment plan. This method proves to be wildly popular with festival goers as this makes purchasing much more accessible to attendees of all ages so they can pay for their tickets over time. Coachella benefits because they're able to secure attendees for their event even before they announce the headliners, which happens months after the advance sale. For Coachella 2019, advance passes for the first weekend sold out in around two and a half hours, which was an hour faster than they did in 2018. While not all events will be held on the Coachella scale, we hope you see here that strategies like early bird pricing creates a feeling of scarcity and opportunity which leads people to feel more motivated to purchase. Plus, you can gauge the numbers for your events early on. For your own event, take the time to think about who your target audiences are, whether you can segment your pricing based on what those groups are interested in paying and what a reasonable ticketing deal looks like for your business. After running the numbers, there are a multitude of ways you can approach pricing products or food, but the best and most beloved way to implement dynamic pricing is with old fashioned discount. With sales, you can incentivize customers to purchase products that are out of season to come visit your business during slower hours or to deem your products more valuable when discounted. This can either be in the form of a limited time frame for a sale online or in store, or you can even create coupons that are offered in a newsletter. Starbucks is a great example with their popular Thursday happy hour special or where customers can do a buy one get one free of a drink sized grande or larger between 2 and 7pm during its happy hour period in October 2019, Starbucks saw an 11% increase in foot traffic and during the most popular hour of their promotion at 6pm Traffic jumped over 15.6% over the pre happy hour average. Not only did this promotion help Starbucks increase sales during their normally slower afternoon, but it also had a larger impact of helping attract 15.3 million new active members through its Starbucks rewards program. When it ran the Happy Hour in November 2018 and I'm sure in the sales department it was a happy hour for them, you know what I'm saying? Dynamic pricing as a strategy is pretty darn cool once you get the grasp of how it actually works. If you're looking for more resources to determine what the best pricing strategy for your business is, check out our Resources section below for our blog posts on other pricing models and our free sales pricing strategy calculator. For more understanding on how to set up a competitive strategy for your business in general, check out our free course, too. And that's a wrap. Now, if you'll excuse me, I'm gonna go hop in an Uber. Not going anywhere. It's just 13 cents, and I'd like to take advantage of that. I'll see you next time. Did I also. Nope, I didn't. I was about to say Star Wars.