Dynamic pricing is a practice where prices are `dynamic? in that they are changed or adjusted for every consumer. Companies, for example can change the price of Cokes in the vending machines if the temperature goes above 85 degrees. Although they create value and satisfy the refreshment needs of their consumers, the distributor accustomed to their products and who view the company as rival is overpriced and are expose to a less competitive ground. If geographical dynamic pricing is not control, then consumers will change to buying related product from other companies, which sell them at a lower price.
Amazon may change the price based on whether the book or other product starts to sell quickly and they notice demand increases or depending on the previous purchase behavior. A change in price results in the movement along a demand. According to Amazon’s marketing department, dynamic pricing is customary, an essential tool for companies and often beneficial to individual customers and society as a whole. Business can maximize return per consumer by providing customized pricing for different market segments.
A company can also gather market intelligence on how much a consumer is willing to pay for a product or service. Conversely, if done wrongly, then dynamic strategies can cause consumers to feel cheated, especially if they can easily perceived that the same product is being sold at lower price elsewhere. On previous purchase behavior, how retailers should tailor their prices based on the customer behavior is not always readily apparent or predictable. For example, should frequent customers be offered better prices?
Maybe a retailer should charge frequent customer because they have him locked in and can rely on him, or maybe they reward him loyalty by charging less. However, with wrong decision they can lose a good customer and leave a lot of money on the table. Retailer has to look at not just how often any given customer has to be on the website, but when they visited, what they bought and whether their transactions were high margin (Fibich et. al. , 2005). Reference: Fibich, G. et. al. , (2005). Dynamic of Price & elasticity of demand in the presence of reference price effects: Journal of the Academy of Marketing Science, 33(1): 66 – 78.