What is the difference between Dynamic and Traditional Pricing?

In the early days, setting a price of a product was mainly related to the costs of that product. The price was simply determined by adding a certain margin to the costs.


However, to the customers who buy the products, the costs are not relevant. They only judge the price of a product on what the product is worth to them: the perceived value. The product value for a customer is not fixed, it changes over time and it might change according to the situation. It is easy to understand that a cold beer on a hot summer day means more to the average customer than that same beer on a freezing cold winter day. Customers are only willing to pay a certain price that feels good or is in accordance to the perceived value of the product at that specific time and in that specific situation. This is the customers’ willingness to pay. The challenge in advanced dynamic pricing is to leverage the customers' willingness to pay.


The first steps in smarter pricing were made in the airline industry. Airlines typically have a fixed capacity: a certain number of seats in an airplane. This capacity is 'perishable' in the sense that at the moment the airplane takes off, the unsold seats are worthless. Every seat that is sold before the plain leaves, contributes to the airlines' revenue, as long as the prices of sold seats are higher than the marginal costs, which is almost zero for airlines. The airline industry started smart pricing in the sixties, with early bird and last minute ticket discounts.

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