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

Summary

This video script by Jamal from HubSpot explains dynamic pricing, a strategy where businesses adjust prices based on demand. It's used in industries like hospitality, transportation, and e-commerce to maximize profit. Factors like supply and demand, market trends, and seasonality influence pricing. Uber's surge pricing is a prime example. The script also discusses the pros, cons, and considerations for businesses contemplating dynamic pricing.

Takeaways

• 🚖 Dynamic pricing, also known as surge or demand pricing, is a strategy where businesses adjust prices based on demand.
• 💰 The core goal of dynamic pricing is to maximize profits by offering different prices at different times.
• 🌐 Industries like hospitality, transportation, airlines, ridesharing, utilities, retail, and e-commerce commonly use dynamic pricing.
• 📈 Key factors influencing dynamic pricing include supply and demand, market trends, seasonality, and competitor pricing.
• 📱 Uber uses dynamic pricing to calculate fares based on time of request, route distance, traffic, and rider-to-driver ratio.
• 📈 Surge pricing on Uber increases prices during high demand to incentivize more drivers to operate in that area.
• 💼 Pros of dynamic pricing include higher wages for employees during peak times and the ability to sell during low-demand periods.
• 🚫 A major con is that customers may feel cheated or trust the business less if they perceive prices as inconsistent.
• 🏢 For dynamic pricing to work, businesses need the ability to gauge demand shifts, a customer base willing to accept fluctuating prices, and sufficient market power.
• 🎟️ Events can use dynamic pricing by offering early bird tickets or varying prices based on event proximity, expected popularity, and ticket tiers.
• 💸 Sales and discounts are a popular way to implement dynamic pricing, incentivizing off-season purchases or visits during slower business hours.

Q & A

What is dynamic pricing?

Dynamic pricing, also known as surge pricing, demand pricing, or time-based pricing, is a strategy where businesses adjust the prices of their offerings to account for changes in demand.

Why is dynamic pricing used by businesses?

Businesses use dynamic pricing to maximize profit based on time-based opportunities and to match the prices with what customers are willing to pay at a given moment.

Which industries commonly use dynamic pricing?

Dynamic pricing is commonly used in hospitality, transportation, airlines, ridesharing, gas and electric companies, retail, e-commerce, event ticketing, and real estate.

How does Uber implement dynamic pricing?

Uber uses an algorithm that considers factors like the time of the call, distance of the route, traffic, and current rider-to-driver demand to calculate the final price, which may result in a surge price during high-demand periods.

What are the benefits of dynamic pricing for businesses?

Dynamic pricing allows businesses to pay employees higher wages during busier times, sell during downtimes, and incentivize customers to make purchases when prices are lower.

What are the potential downsides of dynamic pricing?

The major con of dynamic pricing is that customers might feel cheated or trust the business less if they perceive the pricing as inconsistent or opportunistic.

How can a business determine if dynamic pricing is suitable for them?

A business can consider dynamic pricing if they have the capacity to gauge demand shifts, a customer base willing to pay non-static prices, and sufficient market power or industry peers also using dynamic pricing.

What factors influence the price determination in dynamic pricing?

The price in dynamic pricing is influenced by factors such as supply and demand, value, market trends, seasonality, time of year, and competitor pricing.

How does dynamic pricing impact customers?

Dynamic pricing can impact customers by offering them the option to pay a higher price for a more valuable service during peak times or wait for prices to decrease when demand is lower.

Can you provide an example of dynamic pricing outside of Uber?

Yes, Coachella uses dynamic pricing by offering advance ticket sales with an installment payment plan, creating a sense of scarcity and opportunity, which motivates early purchases.

How does Starbucks implement dynamic pricing?

Starbucks implements dynamic pricing through promotions like their Thursday happy hour special, offering buy one get one free on drinks sized grande or larger between 2:00 and 7:00 PM, which increases foot traffic during slower afternoon hours.

Outlines

00:00

🚀 Understanding Dynamic Pricing

In this paragraph, Jamal from HubSpot introduces the concept of dynamic pricing, explaining its prevalence in various industries. He highlights the fluctuating prices of services like Uber rides and hotel bookings, attributing these variations to dynamic pricing strategies. Jamal emphasizes that dynamic pricing is designed to maximize profits by adjusting prices based on demand and other factors. He encourages viewers to engage with the content by liking the video and subscribing to the HubSpot YouTube channel.

05:02

📊 Factors Influencing Dynamic Pricing

This paragraph delves deeper into the mechanics of dynamic pricing, describing it as a strategy that varies prices based on supply and demand, market trends, and competitor pricing. Jamal uses Uber as a case study, illustrating how the app's algorithm adjusts ride prices based on factors like time, distance, and demand. He explains that during peak times, such as summer weekends in popular cities, prices increase to ensure enough drivers are available. This strategy benefits Uber by either charging higher fares or managing demand through wait times for lower prices.

Keywords

💡Dynamic Pricing

Dynamic pricing, also known as surge pricing or demand pricing, is a strategy where prices for goods or services are adjusted in real-time based on supply and demand. In the video, it is explained as a concept that maximizes profit by matching prices to what customers are willing to pay at a given moment. Examples include Uber's surge pricing during high-demand periods or airlines adjusting ticket prices based on seat availability.

💡Profit

Profit is the core of every pricing strategy, including dynamic pricing. It refers to the financial gain a company makes after deducting the costs of running the business. The video emphasizes that dynamic pricing aims to maximize profit by leveraging time-based opportunities, such as increasing prices during peak demand.

💡Supply and Demand

Supply and demand are economic concepts that influence prices. Supply refers to the amount of a product or service available, while demand is the desire for it. The video uses Uber as an example, explaining how an increase in demand for rides during a busy evening can lead to higher prices due to limited supply.

💡Seasonality

Seasonality refers to the predictable increase or decrease in demand for certain goods or services at specific times of the year. The video mentions that seasonality is a factor in dynamic pricing, as prices may be adjusted to reflect higher demand during peak seasons, such as hotel room rates during the summer.

💡Surge Pricing

Surge pricing is a specific type of dynamic pricing where prices are temporarily increased during periods of high demand. The video explains how Uber uses surge pricing to encourage more drivers to work during times of increased demand, such as on a busy summer evening.

💡Market Trends

Market trends are patterns or changes in consumer behavior that can influence pricing. The video suggests that businesses consider market trends when setting dynamic prices, as understanding these trends can help predict and respond to changes in customer demand.

💡Time of Year

The time of year can affect demand for certain goods and services, which is why it's a factor in dynamic pricing. The video gives the example of higher hotel prices during spring break in Cancun, illustrating how seasonal demand can drive up prices.

💡Competitor Pricing

Competitor pricing refers to the prices set by similar businesses in the same market. The video implies that businesses may adjust their dynamic pricing based on what their competitors are charging to stay competitive.

💡Incentivize

Incentivize means to motivate or encourage a particular action. In the context of the video, dynamic pricing can be used to incentivize employees to work during busier times by offering higher wages, or to encourage customers to purchase during off-peak times with lower prices.

💡Scarcity

Scarcity refers to a shortage of something that is needed or desired. The video uses the example of Coachella's advance ticket sales to illustrate how creating a sense of scarcity can motivate customers to act quickly, such as buying tickets before they sell out.

💡Happy Hour

Happy hour is a promotional strategy used by businesses, like Starbucks, to offer discounts or special deals during specific hours to attract customers. The video mentions Starbucks' happy hour as an example of dynamic pricing, where they increased foot traffic by offering a buy one get one free deal on drinks.

Highlights

Dynamic pricing adjusts prices based on demand.

Also known as surge, demand, or time-based pricing.

Aims to maximize profit based on time-based opportunity.

Prices are calculated to match customer willingness to pay at a given moment.

Common in hospitality, transportation, airlines, ridesharing, and more.

Core factors include supply and demand, value, market trends, seasonality, and competitor pricing.

Uber uses dynamic pricing to calculate fares based on time, distance, traffic, and demand.

Surge pricing incentivizes drivers to areas of high demand.

Dynamic pricing can lead to higher wages for employees during busier times.

It allows businesses to sell during downtimes by offering lower prices.

Customers may feel cheated if they perceive prices as inconsistent.

Dynamic pricing is not suitable for all industries.

Businesses should have the capacity to gauge demand shifts.

A customer base willing to pay non-static prices is necessary.

Sufficient market power or industry peers using the same strategy is important.

Dynamic pricing can be implemented for events or through discounts.

Coachella uses advance ticket sales with a payment plan as a form of dynamic pricing.

Starbucks increased foot traffic with a happy hour discount.

Transcripts

Have you ever wondered why Uber is like $0.13 sometimes and $7

million other times--

literally takes your first born 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 channel.

[MUSIC PLAYING]

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 well 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 A change in 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 few-- hospitality, transportation, airlines

and ridesharing, 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 a number 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 requesting

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 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 surge 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 lower, 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 scammed 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's 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.

One, 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.

Two, 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

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.

Three, 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 ride share

movement, and now they're one of the most established names

in the industry.

And as a result, they're one of the companies

that users turn 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 pressing 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 advance ticket sale which

is the buyers 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 event sale.

For Coachella 2019, advance passes for the first weekend

sold out in around 2 and 1/2 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 tragedies

like earlybird pricing creates a feeling of scarcity

and opportunity, which leads people to feel

more motivated to purchase.

Plus, you can get some 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, where customers

can do a buy one get one free of a drink sized grande or larger

between 2:00 and 7:00 PM.

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 6:00 PM,

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 going to go hop in an Uber.

I'm not going anywhere, it's just $0.13,

and I'd like to take advantage of that.

I'll see you next time.

[MUSIC PLAYING]

Did I also-- nope, I didn't.

St-- I was about to say Star Wars.