Dynamic pricing

Dynamic pricing, also referred to as surge pricing, demand pricing, or time-based pricing is a pricing strategy in which businesses set flexible prices for products or service based on current market demands. Businesses are able to change prices based on algorithms that take into account competitor pricing, supply and demand, and other external factors in the market. Dynamic pricing is a common practice in several industries such as hospitality, travel, entertainment, retail, electricity, and public transport. Each industry takes a slightly different approach to repricing based on its needs and the demand for the product.

Time-based pricing is the standard method of pricing in the tourism industry. Higher prices are charged during the peak season, or during special-event periods. In the off-season, hotels may charge only the operating costs of the establishment, whereas investments and any profit are gained during the high season. (This is the basic principle of the long run marginal cost (LRMC) pricing, see also Long run).

Hotels and other players in the hospitality industry use dynamic pricing to adjust the cost of rooms and packages based on the supply and demand needs at a particular moment. The goal of dynamic pricing in this industry is to find the highest price that consumers are willing to pay. Another name for dynamic pricing in the industry is demand pricing. This form of price discrimination is used to try to maximize revenue based on the willingness to pay of different market segments. It features price increases when demand is high and decreases to stimulate demand when it is low. Having a variety of prices based on the demand at each point in the day makes it possible for hotels to generate more revenue by bringing in customers at the different price points they are willing to pay.

Airlines change prices often depending on the day of the week, time of day, and number of days before the flight. For airlines, dynamic pricing factors in different components such as: how many seats a flight has, departure time, and average cancellations on similar flights.

Congestion pricing is often used in public transportation and roadways, where a higher price at peak periods is used to encourage more efficient use of the service or time-shifting to cheaper or free off-peak travel. For example, the San Francisco Bay Bridge charges a higher toll during rush hour and on the weekend, when drivers are more likely to be travelling. This is an effective way to boost revenue when demand is high, while also managing demand since drivers unwilling to pay the premium will avoid those times. The London congestion charge discourages automobile travel to Central London during peak periods. The Washington Metro and Long Island Rail Road charge higher fares at peak times.

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