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Updated: March 27th, 2020
In case you’ve missed it, Broadway hit Hamilton has been all the rage — and as it sweeps the country on tour, it doesn’t show any signs of slowing down. Ticket prices have skyrocketed (even exceeding the $1,000 mark!), and Lin-Manuel Miranda’s masterpiece has earned its title as not only the most hyped show in Broadway’s history, but also the most expensive.
But how did the producers convince some customers to pay so much for 2 hours and 45 minutes of a hip-hop musical history lesson? For those of us who don’t have a degree in economics, it comes down to a simple principle: supply and demand.
A staple of airline, hotel, and ride-share industries, dynamic pricing is basically “real-time pricing,” which involves increasing or decreasing prices for your products or services based on levels of demand. While Hamilton doesn’t use true dynamic pricing — that is, it doesn’t use the same automatic calculations that gauge how much you might be willing to pay for a flight to Boca Raton this weekend — it does borrow the same principles.
The concept is simple: you adjust the price of your goods or services in response to market demands. For example, an airline may increase its ticket prices over a long weekend to a popular travel destination, just like Uber may increase its fares for rides around popular sports bars during the Super Bowl. This flexibility in pricing can help businesses spur demand during slow periods (because it’s such a deal!) and maximize profits during the busiest times (because everyone wants in on the excitement).
Whether you’re offering high-end bathroom remodels, cost-effective shipping supplies, or, yes, even tickets to an instant Broadway hit, here are three basic lessons business owners can learn from dynamic pricing models:
This requires a little more data know-how than simply throwing a few price points at the wall and seeing what sticks. By collecting and analyzing data about your customer-base, you can more accurately predict what price a particular customer segment is willing to pay at a particular point in time, and then adjust prices accordingly.
Investing in data may sound intimidating, but you may be surprised at how much data about your customers and market you already have in your systems. Think of what information you have access to, such as Salesforce or your point of sales system. This could include your customer’s primary demographics such as age or zip code, along with their purchasing behaviour like how many times they visited your website before making a purchase, what time they typically purchase your products, or which email marketing promotion was the catalyst for their last purchase.
Add Honest Abe to the list of presidential lessons: your grandmother was right, and you should make a point to be honest with your customers. If you’re not, best case scenario is potential customers could feel confused or mislead — worst case, they may tell all of their friends (and social media).
Make sure your customer fundamentally understands why they may be asked to pay more than their friend did three months ago. It’s only fair they know that things are more expensive during your busy season. This may mean that they decide to wait it out until prices drop again — if you see this happening a lot, this could be a sign that you should revisit your prices.
Regardless of whether you opt for a dynamic pricing model, pricing decisions should never be a singular decision made once a year (or even less frequently!). Your costs, customers, and competitors can and will change over time, so it’s important to talk to your customers regularly and make sure to adjust your pricing to market demand. Here are a few factors to keep your eyes on:
Let’s say you run Aaron Burr’s Brownie Bakery, which specializes in a range of custom-made brownies for all occasions. Your base costs would be all the expenses that go directly into making your delectable brownies, and your overhead expenses are other costs such as rent, insurance, office equipment, and some salaries. From your weekly milk delivery from the farm just outside of town, your once-yearly accountant, or the extra help you’ll need to hire for the busy season, it all adds up and can change constantly.
Tip: What happens when your supplier raises their prices? Read about how Peter Koshland planned ahead and saved his business over $20,000!
Are they comparable? Do you offer something they don’t? It’s okay to not be the cheapest around, but think about who your target market is and what they might be willing to pay for your product or service.
You determine the supply, but your customer base determines demand. If you suddenly get a flood of orders, there’s probably a limit to how many brownies you can bake in a week. If you find yourself consistently turning down orders because you just don’t have time, it may be time to consider a price hike! You may not get to sell $800 Hamilton brownies, but we’ll be cheering you on all the same.
Ready to make a big leap for your business, but don’t have the cash on hand to pay for it? A Funding Circle term loan could help! Whether you want a bigger space to produce more or buy supplies in bulk to save big, we can help. Check your eligibility in just 60 seconds today.
Paige Smith is a Content Marketing Writer and Senior Contributing Writer at Funding Circle. She has a bachelor's degree in English Literature from Cal Poly San Luis Obispo, and specializes in writing about the intersection of business, finance, and tech. Paige has written for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.