WHAT IS DEMAND BASED PRICING?

What is demand based pricing? It is a strategy that takes into account known periods of high demand and establishes prices accordingly to maximize sales over a given period.

It is perhaps easier to explain this commonly used strategy with examples.

For the first example, lets take the airline industry. A ticket from Montreal to Miami purchased in August will not be the same price as one bought in January. Why? The aircraft consumes the same amount of fuel, there are the same number of employees on board (pilots and flight attendants) and airports costs are comparable (the aircraft must be de-iced in Winter, but how much does that cost impact the ticket price?). In addition, a flight in August to Miami is much more likely to be partially filled than in January. If the cost based pricing strategy was used, then ticket prices in January should be lower (costs are split over a larger number of travelers). But the opposite is true. Why? Because of the demand. As a very large amount of people are limited with their vacation dates and that Miami is a vacation destination of choice, this creates more demands for the tickets hence the prices go up.

Another industry using the same pricing strategy and for the same reasons is the hotel industry. A room rented for the weekend will be more expensive than the same room rented during the week. A room rented last minute can be more expensive than one rented a few weeks in advance. Finally, if the hotel is in a tourist area, a rented room for Christmas/New Year will be more expensive than the same room for a week in let’s say October.

This is the same phenomenon that goes on when homeowners put up their house for sale on a sellers’ market; the final selling price can often exceed the asking price because of overbidding. But here we are talking about the consequence of a favorable market, not a pricing strategy used by sellers.

Airlines and hotels industries are not the only ones using this strategy. What about the seasonal clothing industry? Shorts sold in spring will not be the same price as the same shorts sold at the end of summer. This is the same phenomenon at work; relying on supply and demand. There are more people who need shorts for the summer than people who will buy the same shorts at the end of the season. There is another element that is to be taken into account here: inventory management. It is more profitable for retail companies to give a discount and move an inventory stock that has not been sold than to keep it and occupy the space of the garment that will be sold at a high price in the next season. Of course consumers who understand this strategy, and have some flexibility, will buy the shorts at the end of the season at a discounted price for the up and coming season. Retail companies have less control over periods of high demand than the airline industry. That being said, they are trying to create this demand by offering seasonal “trends” that change from year to year. So if the shorts you buy off season are pastel and next year’s colors are bright, you may find yourself somewhat out of phase. Unless you are not too worried about fashion trends.

One last example: the products sold to your farmers’ market. If you get there early in the morning and the farmer is getting his goods out to start the day, the price will be a different price than in the evening when he must put the unsold products in his truck. Of course in the morning you have the choice of the finest products. But if you take tomatoes, the effect of supply and demand plays a bigger role in price variation than the appearance of the tomato.

The industries using this strategy are multiple. But for it to work, there must be a supply and demand effect and a certain resistance to competition. Depending on your niche, it is a pricing strategy that can be considered.

If you have any questions or comments, do not hesitate.

Stéphane Elmaleh-Riel, B.Ed., MBA
Marketing consultant