Customers have specific price points they’re willing to pay for a product.

That price is unique to the individual based on their urgency of need, disposable income, perceived value of the product, and more. One customer might be willing to pay no more than $2 for their morning coffee, while another would pay $8 for that perfect cup of java.

While market conditions can shift quickly, when businesses charge a single, static price for their product, they’re missing out on two opportunities: to serve customers who would only pay less, and to charge more to the customers who are willing to pay more. These missed opportunities have led some businesses to implement dynamic pricing practices.

What is dynamic pricing?

Dynamic pricing, or surge pricing, is when a business changes prices based on demand, supply, and how much customers are willing to pay. It means offering flexible prices that shift in response to changing conditions instead of sticking to one fixed amount.

Some of the most well-known examples of dynamic pricing are in the travel/transportation industry. Uber is known for its surge pricing: the cost of a ride can increase drastically if many other people in the same area are looking for a ride. This approach often relies on real-time pricing adjustments that reflect sudden changes in supply and demand.

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How does dynamic pricing work?

At the heart of dynamic pricing is data analysis. Businesses use dynamic-pricing algorithms to interpret real-time data, competitor prices, and supply constraints.

These algorithms can employ machine learning to refine predictions further and optimize prices. They rely on inputs such as historical sales data, website traffic, and inventory levels to respond quickly to fluctuations in demand and ensure the right price is offered at the right time.

These rules can be very simple or quite advanced:

• Simple example: A lemonade stand charges $1 on rainy days (low demand) and $3 on sunny days (high demand).
• Advanced example: An online store automatically raises the price when website traffic jumps. or if fewer than 10 units remain in stock.

There are also different types of dynamic pricing strategies:

• Real-time dynamic pricing: Prices can change every few minutes or hours with the help of software. Rideshare apps often use this so pricing responds to demand surges during rush hour, special events, or any unexpected surges.
• Scheduled (rule-based) dynamic pricing: Prices change based on a set schedule or triggers. For example, a hotel might always raise its rates during a popular convention.

Some businesses use AI to predict demand changes (e.g., based on weather or local events) and automatically set prices. But overusing surge pricing can upset customers who feel it’s unfair.

Businesses using a unified commerce solution like Shopify can pull inventory data, competitor pricing, and customer behavior from all selling channels (online, in-store, marketplaces, social media, etc.) into one place. This consolidated data is essential for accurate, timely dynamic pricing decisions.

Dynamic pricing is often used in industries like:

• **Travel and transportation: **Airlines and rideshare services adjust fares based on demand and availability.
• **Retail and ecommerce: **Online stores keep an eye on competitor prices and customer shopping behavior.
• **Hospitality: **Hotels change room rates for busy seasons, local events, or weekends.

Dynamic pricing works best when you use the right data, set clear rules, and keep an eye on the results. This strategy can increase profits and satisfaction. Buyers willing to pay more can get items right away, while others can wait for lower prices.

Dynamic pricing examples

There are many types of dynamic pricing. The dynamic pricing examples below are among those most commonly used by ecommerce and brick-and-mortar retailers.

1. Time-based pricing

Time-based pricing changes prices depending on when a product or service is sold. It’s one of the most widely used forms of dynamic pricing.

Examples:

• Airlines raise ticket prices around holidays when demand is high.
• Hotels increase room rates during peak seasons or big events.
• Rideshare apps like Uber and Lyft charge more during rush hour or late at night.
• Theme parks may charge higher admission on weekends and holidays.

2. Segment pricing

Segment pricing offers different prices to different groups of people, often based on identity or need.

Examples:

• A streaming service offers student discounts with proof of enrollment.
• Utility companies may offer lower rates to low-income households.
• Retailers give discounts to military members, teachers, or healthcare workers.

These prices are usually accessed by self-identification or through verification (e.g., ID or income proof).

3. Volume pricing

Volume pricing rewards customers for buying more by offering lower per-unit costs.

Examples:

• A warehouse store sells 3-packs of toothpaste at a lower price per unit than a single tube.
• Ecommerce sites like Amazon offer discounts for buying in bulk or subscribing to monthly shipments.
• Event ticketing platforms offer group rates for purchasing multiple seats at once.

4. Auction pricing

Auction pricing lets the customer influence the final price, either directly or through automation.

Examples:

• eBay allows users to bid on items, with the highest bidder winning the purchase.
• Priceline and similar platforms once allowed travelers to “name their price” for hotel rooms.
• Google Ads uses automated auctions to decide ad placement based on how much businesses are willing to pay.

5. Consumer effort pricing

This model encourages price-sensitive customers to do more work in exchange for better deals.

Examples:

• Grocery stores offer coupon books—only customers willing to clip and use them get the discount.
• Electronics retailers offer mail-in rebates, requiring effort to redeem.
• Some stores have “lowest price guarantee” policies—if you find a better price elsewhere and show proof, they’ll match or beat it.

Less price-sensitive customers skip the effort and pay full price, while budget-focused shoppers benefit from the extra steps.

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Benefits of dynamic pricing

Dynamic pricing means adjusting prices based on things like demand or customer behavior. Compared to fixed pricing, it offers several benefits:

• Higher profits and more sales: Businesses can charge more to customers willing to pay more, and offer lower prices to those who are more price-sensitive. This can increase both profit and the number of sales.
• Stay ahead of competitors: If competitors use fixed pricing, dynamic pricing can help win over customers looking for better deals.
• **Better service during busy times: **For example, surge pricing in rideshare apps encourages more drivers to go to high-demand areas, so more people can get rides.
• Helps people with lower income: In some cases, businesses use dynamic pricing to offer discounts to people who need them, like energy companies giving cheaper rates to low-income households.
• **Better customer experience: **Setting the right price at the right time helps meet demand, avoids long waits or empty shelves, and improves satisfaction and customer loyalty.

Dynamic pricing drawbacks

While dynamic pricing has its upsides, there are some downsides to watch out for:

• **Can seem unfair: **If people have no other options, higher prices can feel like price gouging. For example, surge pricing in areas without public transportation may leave customers feeling taken advantage of.
• **Loss of trust: **If customers see the same product sold for different prices—like $150 in-store and $125 online—they may feel it’s unfair and stop buying.
• Customer pushback: Once people know prices change, they might wait for lower prices or avoid buying at all, especially if they think someone else is getting a better deal.

Factors that affect dynamic pricing

A business needs to consider three types of factors to achieve a successful dynamic pricing strategy:

1. Demand-side factors: Businesses need to understand if demand for their products is stable, or if it changes by time or day. They also need to consider if different customer segments have a different willingness to pay, and what affects that. For example, business travelers are often willing to pay more for flights, but they often need to book them on much shorter notice than other airline travelers.
2. Supply-side factors: Dynamic pricing can be used to manage supply. If a business has excess inventory, more discounted dynamic pricing can be used to clear it, whereas if you have highly limited supply, dynamic pricing can raise prices to help avoid stockouts.
3. Business model: Dynamic pricing should be informed by a business’s gross margins. If a business offers dynamic prices that cause it to sell products without making any margin, this is typically not a winning strategy.

How to implement dynamic pricing

Dynamic pricing is most effective when it’s part of a broader pricing approach focused on price optimization. The steps below outline how to implement and manage a dynamic pricing strategy:

1. Determine pricing factors

Start by understanding what would cause your customers to pay more or less. This can be due to seasonality, time of day, income, or perceived value. This can be informed by analyzing sales data or through customer research and feedback.

2. Set rules and parameters

Determine the specific events or criteria that would trigger a lower or higher price. For example, you may set rules to increase price when you have less than 10 units left in stock, or to decrease price if you haven’t sold a unit in one week.

Make sure you have boundaries in place that consider your supply and your business model: Generally, you don’t want a stockout or to be left with excess inventory, or to sell inventory at a loss.

Once you’ve determined these parameters, you can work with a web developer to implement dynamic pricing in your store using Shopify Functions, a tool that allows you to set custom pricing rules. Dynamic pricing software like Prisync can help automate this process as well.

3. Evaluate and update

Review your dynamic pricing at least once a year. Dynamic pricing should lead to higher margins, happier customers, and more balanced inventory. If it isn’t having that effect, then there is an opportunity to improve, or move back to static pricing.

Dynamic pricing vs. variable pricing vs. price discrimination vs. fixed pricing

In a dynamic pricing model, a product’s price changes on an ongoing basis (sometimes in real time) based on preset rules, such as changes in customer demand.

In variable pricing, the price changes, but on a set schedule (for example, higher prices on weekends).

Price discrimination is a form of dynamic pricing, but focuses on specific customer demographics, such as age or gender, and is not an accepted practice.

Fixed pricing, or static pricing, is when every customer receives the same price, regardless of supply and market demand.

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Dynamic pricing FAQ

Is dynamic pricing legal?

Dynamic pricing is generally legal in most countries, although the context and industry (such as airlines, hotels, and ridesharing services) may impose certain restrictions or requirements. However, it can be seen as predatory in some cases, especially if it leads to price gouging during emergencies, exploits vulnerable consumer groups, or eliminates market competition that may be in violation of antitrust laws. Consult with a legal or pricing expert to assess the risk of your dynamic pricing strategy.

How can I address customer concerns about dynamic pricing?

Start with a dynamic pricing model designed to benefit the customer. Customers should perceive your pricing as offering more value for a higher price and more accessibility for a lower price.

Is dynamic pricing better?

Dynamic pricing methods can lead to better gross margins, maximized revenue, and happier customers. However, when done poorly, it can reduce customer satisfaction, sales, and margins. So the right pricing model is ultimately the one that best fits your business.