Dynamic Pricing Tools
Q1.Compare to fixed price, dynamic pricing is varying price over time in responding to change demand conditions. Since the demand is conditions will change during different periods. Therefore, dynamic pricing is essential improves revenue compared to fixed pricing. Seasoning pricing is one of the dynamic pricing tools, adjust the price for a temporal change in demand. Airline industry offers a low-season discount to attract people in low season. Since capacity is fixed, it is difficult to change the capacity according to different demands. As we know, Revenue = price x sales. Offering low-season discount can increase more utilization in low season. Improved utilization will increase the revenue than a fixed price.On the other hand, companies can increase the price in peak season to absorb consumer surplus. Demand is high in peak season, customers willing to pay more for the product or service when scarcity of the supply appeared. Sale not changes and adjust to a higher price can increase the total profit.In addition, customer valuation for a product is seasonal, value-based pricing needed to be updated accordingly. It does not make sense charge charismas trees same price in a different season. Also, the resource supply will change over time, the product price may change according to rather than fixed price. So can match with supply condition too.
Another dynamic pricing tool is selling off a fixed supply: Markdown and Promotional pricing. As demand is volatile and uncertainty, it may differ from the forecast. When actual inventory is higher than forecast, markdown opportunity appeared. Companies will offer promotion discount to sell the inventory to avoid the inventory cost. Also, some product is perishable, markdown can improve the likelihood that products are sold before perishing than a fixed cost. When actual inventory is lower than forecast, makeup opportunity appeared. Companies will increase the price to absorb consumer surplus using the price discrimination. Those may improve the revenue than using fixed cost, no matter the demand quantities, customer valuation and market condition change. Q2. There are several reasons may cause this phenomenon. Companies may use the wrong price control or capacity control in revenue management thus have higher capacity utilization but lower total profits. In price control, companies may mistakenly analysis the customers willingness to pay. Although customer willing to pay more, hotel providing a large number of low-value products. Therefore, cause the higher capacity utilization but lower total profits.In addition, adopted last minutes sale can achieve higher capacity utilization. However, high- value customer is non-price sensitive and flexible schedule, they will per last minutes booking. Low-value customer is price sensitive and little unconcern about the schedule flexibility. Therefore, both customer will prefer last minutes sales. There is no customer segment, more buy down behavior, the total profit will be lower.