Demand-Based Pricing: Definition, Types, and Examples

In order to master the art of profitability, it is crucial to understand the supply and demand patterns of the market. Knowing what your customers want, and how much they are willing to pay for it drives an effective sales strategy. One such strategy is demand-based pricing. Ever noticed how flight tickets generally get more expensive during holiday seasons? Or how iPhone costs gradually decrease over time as they become less recent? These scenarios are picture-perfect examples of demand-based pricing.

Without further ado, let us define demand-based pricing and explore what it entails.

What is Demand-Based Pricing?

Demand-based pricing is a pricing model whereby businesses adjust the prices of their products according to market demand. There are seasons in which the demand of certain products skyrocket. Leveraging this grown demand, businesses raise the price of those products to make maximum profits. Conversely, if certain products get low in demand, and are less sought after by customers, businesses lower their prices. Lower prices in this time period motivates more customers to buy those products, before they become popular again. Hence, whether the demand for their products is low or high, demand-based pricing creates a win-win situation for businesses. Customers are attracted to buy their products in both the scenarios.

Pricing based on demand enables businesses to offer market competitive pricing. More importantly, customers view this pricing as ‘fair’. That is because it aligns with their cost expectations. Getting customers to think that way is a game changer for businesses. After all, why would consumers be willing to pay for something if they think they are being charged unfairly. This means that demand-based pricing aligns well with consumer psychology.

Before delving in further technicalities, let us first go through some examples of demand-based pricing for better understanding.

Examples of Demand-Based Pricing

These are three of the most popular scenarios of demand-based pricing:

Clothing Retail Stores

Clothing stores popularly rely on demand-based pricing for setting up their items’ prices. For instance, winter accessories are at their peak cost in the winter season. That is because winter clothing is a necessity for people at that time. However, the leftover winter stock gets sold at a cheaper price once the season changes. Because winter items stop being in demand. And the next season’s items replace them. Some customers take advantage of the lowered prices to stock up on winter clothes for the next year. So, the stores are able to sell both ways. Most importantly, they are able to make the most revenue out of their items in the peak season.

Airlines

Holiday seasons like Christmas and New Year are the most popular time periods for people to travel. Because…well, holidays! Airlines do not miss this opportunity to capitalize. The price of tickets rises just as high as the demand. Customers still buy those flight tickets. Because they have to. And the ticket prices are also within their expectations, as they are already aware of the season-based price fluctuations. Leveraging this situation, airlines pocket as much revenue as they can.

Cloud Storage Companies

Cloud storage subscription prices undergo a spike when its demands increases. The demand generally increases in the holiday, taxation, or back to school seasons for the safekeeping of more data. Companies that offer cloud storage leverage this opportunity to increase their prices for increased profits. Customers on a tighter budget can always subscribe for storage before the peak season. They might also be offered early-bird discounts to encourage early sign-ups. In this way, the companies ensure that they acquire customers in both the high and low demand seasons, and remain profitable.

What are the Methods of Demand-Based Pricing?

Demand-based pricing comes under the umbrella of dynamic pricing. Dynamic pricing helps businesses allocate prices to their products to gain maximum revenue. There are several factors that businesses need to take into consideration for carrying out effective demand-based pricing. These factors include consumer preferences, market trends, the perceived value of the products, etc.

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These are some methods of demand-based pricing employed to maximize profitability:

1. Price Skimming

It is a demand-based pricing strategy whereby businesses launch a new product for an initial high cost. This cost gradually decreases over the product lifecycle. This pricing strategy is popular in tech industries. The iPhones example given above is a classic scenario of price skimming.

When a new tech device such as a smartphone is launched, it is sold at a very high price. This price is targeted at customers who are enthusiastic to adopt this technology as soon as it enters the market. The more the sales of this product are at this initial period, the more the profit the company makes. This strategy helps the company recover those initial costs too which are put in the research and development of their product.

Then, as time passes, the price of the product is lowered. This is crucial to make the product accessible to a wider audience. It is effective in combating any market competition that may have arisen, and prevents customers from buying similar products from other brands at cheaper prices.

2. Penetration Pricing

It is a pricing strategy whereby businesses launch a new product at a lower initial cost. Gradually the price of the product is increased to increase profits. This strategy basically is a reversal of price skimming. Penetration pricing is adopted by brands seeking to establish a stable customer base. That is why they introduce their products at low prices at first, in order to attract a considerable number of consumers.

Once their brand traffic increases, and they earn customers’ confidence regarding their product value, they began to increase their prices. Customers who have shopped the products before, and are satisfied with product quality are likely to buy them again even with increased prices. That is because a price increase can be perceived natural over time. This helps companies make greater profits in the long run.

3. Geo-Based Pricing

As the name suggests, geo-based pricing refers to adjusting product prices according to the location of the consumers. Businesses are well aware of the fact that customers living in different geographies of the world do not have the same purchasing power. Countries are divided by their economies. Moreover, the rules of taxation, currency rates, market demands, and competition also vary across countries.

Therefore, multi-national companies may price their products differently for each region. Regions with more financially able people will be offered a service or product for relatively higher costs than regions with people with a lesser purchasing power. This strategy helps the company’s pricing to be perceived as fair across regions, and lets them develop strong customer bases in various regions.

4. Yield Management

This demand-based pricing method is mostly based on customer behavior, time-sensitiveness, and inventory control. Businesses manage their inventory in a way that attracts customers willing to pay the highest prices for their available services. The services are time-limited, and thus their availability creates a sense of urgency within the interested customers.

The airlines scenario given above is a great example of this strategy. Another example is that of a famous event ticketing. As the event dates approach, and the tickets supply becomes limited, the ticket prices skyrocket. That is because the organizers are certain that the remaining tickets will be bought by the willing customers no matter their price. Hence, it becomes a great opportunity for them to raise the ticket prices in the days closest to the event, and attain maximum revenue.

5. Value-Based Pricing

Value-based pricing strategy is based on the perceived value of a company’s or brand’s products. A product is priced higher if its consumer base thinks it should be priced higher. The same goes for the products with a lower cost. Companies highlight some premium features of their products or services for the customers, so that the customer perception is created accordingly. The more premium a product appears to the consumers; the higher cost is applied to it.

A popular example of this pricing model is presented by the luxury brands. Customers expect the goods from big brands to be expensive generally. That is why the prices of such branded items are based more on their premium allure for the customers, than their production costs.

What is the Significance of Demand-Based Pricing?

The application of demand-based pricing comes with a lot of benefits. This is especially true for the SaaS industry. That is because SaaS businesses can acquire more detailed, and real-time insights into their customer behavior, thanks to their operations being digital. Here are some major benefits of demand-based pricing:

• Revenue Optimization 

Demand-based pricing assists businesses in attaining maximum revenue. It does so by adjusting the prices of products and services according to consumer demands. These demands fluctuate, and so do the product prices.

Demand-based pricing ensures that a business always stays profitable. In times where its products are highly in demand, it can increase their prices for optimum profit. Conversely, if those products are not popular, it can reduce their costs to encourage more people to buy them. This ensures that the business remains competitive in the market, and maintains a solid customer base.

• Enhanced Customer Insights

If you want to price your products based on demand, you have to conduct a detailed analysis of your customer activity. After all, customers are the ones whose behaviors and preferences primarily influence the demand of certain products over others.

This analysis equips businesses with the necessary insights to capitalize on the right opportunities. Companies can also create effective marketing campaigns based on customer expectations. They can offer services or features that their customers consider premium, and are willing to pay more for. They can also highlight those assortments of their products which are the most popular in the market.

Hence, studying customer behavior is integral to demand-based pricing, and it helps companies fine-tune their offerings for enhanced profits.

• Improved Customer Experience

Whether your customers think of your pricing as fair or not might make or break your brand image. Demand-based pricing allows you to respond to the customer expectations. You can dynamically adjust your prices according to the fluctuations in customer demand. In this pricing strategy, the product costs are justified by the consumer demand itself.

Moreover, demand-based pricing targets different customer segments. It benefits both the customers who are willing to spend more for a certain product or service, and the customers who are willing to pay less. Thus, it generally boosts customer satisfaction.

Final Word

Demand-based pricing is one of the strategies of dynamic pricing SaaS that focus on maximizing revenue by targeting consumer demand. It is a popular pricing approach centered around customer preferences, and aims to boost customer satisfaction. Businesses price their products and services in a way that allows them to increase their profits without compromising their customer base.

At SubscriptionFlow, we have a dynamic pricing engine that lets you adopt your desired pricing method seamlessly. Leverage our robust reports and analytics features, and get real-time insights into your customer activity. Use this data to make your demand-based strategy successful, and frictionless.