What is Dynamic Pricing?
Dynamic Pricing is an AI-driven pricing strategy that automatically adjusts prices in real time based on factors such as demand, competition, inventory levels, customer segments, and market conditions. It enables businesses to maximise revenue and margins by setting optimal prices that reflect the current market environment rather than relying on static price lists.
What is Dynamic Pricing?
Dynamic pricing is a strategy in which businesses use algorithms, data analytics, and machine learning to continuously adjust the prices of their products or services based on real-time market conditions. Instead of setting a fixed price and leaving it unchanged for weeks or months, dynamic pricing systems analyse multiple variables and update prices automatically, sometimes multiple times per day.
This approach has been used by airlines and hotels for decades, but AI has made it accessible to businesses of all sizes across many industries. Today, e-commerce retailers, ride-sharing platforms, logistics companies, and even brick-and-mortar stores use dynamic pricing to optimise revenue and competitiveness.
How Dynamic Pricing Works
AI-powered dynamic pricing systems consider multiple factors simultaneously:
Demand Signals
- Real-time demand: Current purchase velocity and browsing behaviour
- Historical demand patterns: Seasonal trends, day-of-week effects, and promotional impacts
- Demand forecasting: Predicted future demand based on market trends and external events
Competitive Intelligence
- Competitor pricing: Real-time monitoring of competitor prices for similar products
- Market positioning: How your pricing compares to the market average and key competitors
- Competitive response patterns: How competitors typically react to price changes
Inventory and Supply Factors
- Current stock levels: Adjusting prices based on remaining inventory
- Replenishment timelines: Considering lead times for restocking
- Perishability: Factoring in product shelf life or time-sensitive availability
Customer Factors
- Customer segmentation: Different pricing strategies for different customer groups
- Willingness to pay: Estimated price sensitivity for different products and segments
- Purchase context: Time of day, device type, and purchase history
External Factors
- Weather: For products with weather-dependent demand
- Events: Holidays, festivals, sporting events, and local occasions
- Economic conditions: Currency fluctuations, inflation trends, and economic indicators
Dynamic Pricing Use Cases
- E-commerce: Adjusting product prices based on demand, competition, and inventory levels. Major platforms in Southeast Asia like Shopee and Lazada use dynamic pricing extensively.
- Hospitality: Hotels and resorts adjusting room rates based on occupancy, events, season, and booking window
- Transportation and logistics: Ride-sharing services, airlines, and freight companies adjusting prices based on demand and capacity
- Retail: Physical stores using electronic shelf labels to adjust prices throughout the day based on demand patterns
- SaaS and subscriptions: Optimising pricing tiers, promotional offers, and renewal pricing based on usage data and competitive positioning
Dynamic Pricing in Southeast Asia
Dynamic pricing is particularly relevant in Southeast Asia's diverse and fast-moving markets:
- E-commerce dominance: Southeast Asia's e-commerce sector is one of the fastest growing globally, and dynamic pricing is essential for competitiveness on platforms where price comparison is instant
- Multi-currency markets: Businesses operating across ASEAN must account for currency fluctuations in their pricing strategies. AI can automatically adjust prices to maintain margins across different currencies
- Festival and holiday sensitivity: The region's numerous holidays and festivals, from Chinese New Year to Hari Raya to Songkran, create demand patterns that dynamic pricing can capitalise on
- Price-sensitive consumers: In many ASEAN markets, price is a primary purchase driver. Dynamic pricing helps businesses offer competitive prices while protecting margins
Ethical Considerations
Dynamic pricing must be implemented thoughtfully to avoid customer backlash:
- Transparency: Customers increasingly expect fair and understandable pricing. Hidden or seemingly arbitrary price changes erode trust.
- Fairness: Avoid pricing that discriminates against vulnerable groups or appears exploitative during emergencies
- Consistency: Ensure pricing feels logical and predictable, even when it changes frequently
- Legal compliance: Some jurisdictions have regulations around pricing practices, including requirements for price display and restrictions on surge pricing during emergencies
Pricing is the single most powerful lever for profitability. A McKinsey study found that a 1 percent improvement in pricing, on average, translates to an 8 to 11 percent improvement in operating profit, far exceeding the impact of comparable improvements in volume or cost reduction. For CEOs, dynamic pricing is not just a tactical tool; it is a strategic capability that directly drives profitability.
Dynamic pricing also provides competitive intelligence and market responsiveness. By continuously monitoring competitor pricing and demand signals, businesses gain real-time visibility into market dynamics that inform broader strategic decisions. In Southeast Asia's rapidly evolving markets, this responsiveness can mean the difference between capturing market share and losing it.
For CTOs, implementing dynamic pricing is a high-impact AI project with clear, measurable ROI. The technology is mature, with proven platforms available from vendors like Pricefx, Competera, and Dynamic Yield, as well as custom solutions built on cloud AI services. The biggest challenges are typically organisational: gaining stakeholder buy-in, defining pricing rules and guardrails, and managing customer perception, rather than technical.
- Define clear pricing guardrails. Set minimum and maximum prices, maximum change frequencies, and rules that prevent pricing that could damage customer trust or brand reputation.
- Start with a subset of products or services. Implement dynamic pricing on high-volume, price-sensitive items first, then expand as you gain confidence and data.
- Monitor customer reaction carefully. Track customer satisfaction, complaint rates, and conversion rates alongside revenue metrics to ensure pricing changes are not alienating customers.
- Invest in competitive intelligence. Dynamic pricing is most effective when informed by real-time competitor pricing data, so choose tools that include market monitoring capabilities.
- Consider the perception of fairness. In Southeast Asian markets where personal relationships and trust are highly valued, transparent and fair pricing practices are essential for long-term success.
- Build A/B testing into your pricing strategy. Test price points with controlled experiments rather than relying solely on algorithmic recommendations.
Frequently Asked Questions
Is dynamic pricing the same as surge pricing?
Surge pricing is a specific type of dynamic pricing made famous by ride-sharing apps, where prices increase dramatically during high-demand periods. Dynamic pricing is a broader concept that includes both upward and downward price adjustments based on multiple factors. A well-implemented dynamic pricing strategy often reduces prices during low-demand periods as well as increasing them during peak times.
Will customers react negatively to dynamic pricing?
Customer acceptance depends on implementation and transparency. Industries like travel and hospitality have normalised dynamic pricing, and consumers generally accept it. The risk of backlash increases when price changes are extreme, frequent, or perceived as unfair. Best practices include setting reasonable price ranges, being transparent about pricing factors, and ensuring consistent value at every price point.
More Questions
At minimum, you need historical transaction data (prices, quantities, and timestamps), current inventory levels, and competitive pricing data. For more sophisticated pricing, you also want customer segmentation data, demand forecasts, and external signals like events and weather. Many businesses start with basic competitive pricing adjustments and add data sources incrementally as they mature.
Need help implementing Dynamic Pricing?
Pertama Partners helps businesses across Southeast Asia adopt AI strategically. Let's discuss how dynamic pricing fits into your AI roadmap.