Demand-based pricing

Demand-based pricing (or customer-based pricing) is the revenue management strategy of rating products or services according to customer demand trends (historical, current, and forecasted).

Some good examples of a demand-based pricing approach are the airline industry that changes rates dynamically depending on how many people want to book tickets or suppliers of trendy gadgets (e.g. iPhones, smart watches, or PlayStations) who set the highest prices when a large number of people are waiting for a new device.

The main methods of demand-based pricing are

  • price skimming – when the price is the highest at launch of the new product and then gradually decreases;
  • penetration pricing – when the product is underpriced at the initial offering; 
  • yield management – when the pricing strategy is based on understanding the consumer’s behavior and adjusting rates accordingly (this method is notably applied when selling fixed inventory products such as hotel rooms or airline seats);
  • value-based pricing – when prices are set according to the consumer’s sentiment or how much they think a product is worth; and 
  • geo-based pricing – when the price depends on the consumer’s geographical location.

Together with competitor-based pricing and cost-based pricing, demand-based pricing is considered one of the approaches to dynamic pricing. Unlike the other two, its key idea is that price adjustments mostly happen because of demand fluctuations, but not because of competitor activity or internal factors like production costs.

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