What is Demand-Based Pricing?

Price is often at the heart of a business’s success or failure. If prices are too high, customers will shop at the competition, where they can find better deals. Prices that are too low, on the other hand, can signify inferior goods or result in high sales that have margins too small to keep the business running. But how a business implements pricing strategies is more than just trial and error or gut instinct. It requires a thorough examination of what customers are looking for and how much they’re willing to pay for it. Tracking this information can be challenging, however, as customer demand can fluctuate wildly from product to product, region to region or even day to day.

In today’s highly competitive market, where products go viral and fads quickly pass, businesses must emphasize demand when setting prices. This article covers multiple demand-based pricing strategies, how to implement them, common challenges associated with each, technology’s role in staying competitive and more.

What Is Demand-Based Pricing?

Demand-based pricing is a strategy whereby businesses set prices for their products and services based on current market demand, adjusting prices dynamically from real-time to over specific periods, and may adjust prices across different segments. These prices aren’t fixed, and businesses adjust them as demand changes. Traditionally, businesses made these adjustments broadly, based on seasonal trends or predictable, external events, such as a hotel raising rates around a popular convention. However, with the rise of sophisticated data analytics, demand-forecasting software and automated price adjustments, many businesses choose to adjust their prices incrementally and quickly, based on real-time fluctuations in demand.

Much like the traditional view of supply and demand, these price adjustments are informed by customer behavior, competitor prices, market conditions and sales data. But demand-based pricing is more agile and responsive to small changes, helping businesses optimize revenue when demand shifts. However, this approach requires businesses to carefully monitor market trends and customer responses to avoid driving customers away or causing reputational harm when factors such as market disruptions, new advancements or major demand shakeups occur. For example, say a popular concert tour has high demand, causing ticket prices to skyrocket well above the normal rate. While these tickets may sell at a premium price this time, the situation can leave shut-out fans frustrated at the process, driving them away from — and reducing demand for — future events. The cornerstone of demand-based pricing is finding the right balance between short-term revenue and long-term customer satisfaction.

Key Takeaways

• Demand-based pricing enables businesses to actively adjust their prices as demand changes, balancing revenue optimization with customer preferences.
• While demand-based pricing can enhance profitability during demand fluctuations, it also requires careful planning and controls to avoid diminishing customer satisfaction and experiencing potential reputational harm.
• To effectively implement demand-based pricing, especially for real-time demand monitoring and price adjustments, businesses can leverage advanced analytics and demand-forecasting tools. These tools are often part of a larger business platform that integrates market monitoring, sales, costs and other relevant information.

Demand-Based Pricing Explained

Demand-based pricing is a more flexible pricing approach than static or fixed pricing, both of which remain unchanged regardless of demand. This flexibility allows businesses to adjust prices in response to changes in market demand, optimize revenue during peak periods and maintain sales when demand drops. Demand-based strategies require businesses to be agile and swiftly respond to market changes, including shifts in consumer behavior, seasonal trends and competitors’ actions. And this flexibility is more important than ever, given that prices for goods and services fluctuated between an 18% drop to a 66% increase during the two years from 2020 to 2022, according to the November 2023 NFIB Small Business Economic Trends survey of more than 500 small-business owners and members. If a pricing response is delayed, businesses risk alienating customers with high prices or missing out on profits by underselling their offerings.

Dynamic pricing, a subset of demand-based strategies, involves real-time price adjustments based on immediate demand. For example, ride-sharing companies rely on dynamic, or “surge,” pricing to raise prices in busy areas or at popular times, such as after a concert or on a holiday. This technique helps maintain revenue — or increase it — when there is not enough labor to meet current demand. On the other hand, long-term and uncontrolled surge pricing can frustrate customers who wind up paying more for services when they need them the most. This can lead to customers opting to buy from competitors that offer more stable prices, even if those prices are higher during low-demand periods. Like other pricing strategies, demand-based pricing must be executed with caution to ensure that adjustments align with customer expectations and current market conditions.

Demand-Based Pricing vs. Other Pricing Strategies

Finding the optimal price can be challenging, as some products or services may be better suited for different pricing strategies, and there is no one-size-fits-all solution. Before committing to a pricing strategy, business leaders should understand their options to ensure that they pick the right price for their customers.

• Cost-Plus Pricing

  Businesses using cost-plus pricing start by calculating the total cost of producing or providing a good or service. Then, they add a markup to determine its selling price. This markup should be large enough to earn enough revenue to cover indirect business costs, such as shipping or administrative expenses, but not too large as to drive customers away. Cost-plus pricing ensures that all costs are covered, and goods and services aren’t sold at a loss. This method is common because it’s simple and reliable, especially for businesses with predictable expenses and demand. However, cost-plus pricing can be difficult for businesses with smaller production volumes, as they can’t always compete with larger, mass production companies and still maintain healthy margins. This strategy also doesn’t account for demand fluctuations and can lead to missed opportunities during high-demand periods, such as a product going viral and earning higher revenue from other sellers.

• Competitor-Based Pricing

  Competitor-based pricing is a strategy where businesses set their prices in relation to competitors’. This strategy is particularly common in industries with little product and cost differentiation, where price is a key demand driver. For example, local gas stations typically change their prices daily and follow similar trends as their competitors, allowing for some fluctuation based on location, brand strength and other differentiating factors. This strategy can be employed in two ways: setting prices below competitors to draw in business, or setting higher prices to signify premium quality. However, this strategy ignores important factors, such as production and provisioning costs and the amount customers are willing to pay, which can lead to a “race to the bottom” as businesses continue to slash prices to gain a competitive edge, even at the expense of their own profits.

• Value-Based Pricing

  Value-based pricing is more customer-focused than other pricing strategies and sets prices based on the value customers put on goods and services, rather than on costs or competitors. This is a common strategy for subscription companies or businesses that emphasize the added value of their offerings, including higher quality goods, unique features and brand prestige. This method can bring higher profit margins but requires in-depth market research and a detailed understanding of customers’ needs and their ability and willingness to pay. These strategies are often closely linked to marketing to better communicate a business’s value to consumers.

Pricing Strategies

Pricing Type	What Prices Are Based On	How Prices Fluctuate
Demand-based	Shifts in demand	Higher prices bring higher revenue when demand spikes; lower prices drive sales when demand drops.
Cost-plus	Production costs	After calculating the cost to produce or provide a good or service, businesses add a markup to generate profit and cover indirect business expenses.
Competitor-based	What competitors are charging customers	Lowering prices below competitors' can attract customers; raising prices above competitors' can signify premium goods and services.
Value-based	What customers are willing to pay	Customers are willing to pay more for unique features, premium goods and services or brand prestige; lower quality or easily replaceable goods typically carry lower prices.

Types of Demand-Based Pricing

Demand-based pricing can take several forms, and businesses can tailor their strategies to best suit their specific market conditions and objectives. By remaining flexible and leveraging data analytics tools, decision-makers can use the diverse strategies below — or a combination of strategies — to optimize revenue for different products lines and services and better serve their customers.

• Price skimming is a strategy in which businesses release new products with initially high prices, then gradually lower them over time. This strategy is often used for innovative products without much competition or when entering a new market to capture the maximum revenue as products move through their life cycle, new competitors enter the market and/or demand wanes. Businesses using price-skimming strategies must be careful not to drop prices too quickly or they’ll lose customers who decide to wait for that drop when a new product comes out. On the other hand, holding prices high for too long risks competitors undercutting a business’s sales with lower-priced alternatives.
• Price discrimination involves varying prices for different customers, based on factors like location, purchase volume or time of purchase. This strategy maximizes profits by charging each customer the highest price they are willing to pay. Setting pricing criteria effectively involves detailed market research and a thorough understanding of customers’ willingness and ability to pay for goods and services.
• Penetration pricing is the opposite of price skimming, as prices start low to quickly gain market share, enter competitive markets and lure in new customers. Then, once a healthy customer base is established, prices rise and margins increase. This strategy can also be employed for individual customers, such as services and subscriptions featuring a discounted trial period before the company begins charging full rates. Startup ventures are known for this strategy, prioritizing growth and users (market penetration) to spur investment before increasing prices to focus on profitability. However, businesses using this strategy must carefully track revenue and ensure that full-cost margins are high enough to compensate for the discounts offered to new customers.
• Bundle pricing offers several products or services together at a lower rate than if customers purchased them separately, offering complimentary products with the goal of seizing upon any surplus in customer’s willingness to pay for one product/service to offset a deficit for the other bundled product or service. The idea is that customers may experience a consumer surplus if they’re willing to pay more for one product than you’re charging but are not willing to pay as much for the other, by bundling the products for a combined price that is still within their total willingness to pay, you can encourage them to purchase both. This strategy encourages sales of less popular items by attaching them to bestsellers and provides perceived value to customers. Bundling is effective when working against competition, focusing on customer convenience, or as a form of pricing discrimination between buyers of individual products and bundles.

When to Use Demand-Based Pricing

Demand-based pricing strategies must be implemented deliberately and carefully. Demand-based pricing strategies rely upon different types of information, and either consumers or sellers may sort themselves. Unfocused or haphazard price fluctuations can frustrate customers and negatively impact revenue. By understanding which goods, services and markets are best suited for these strategies, businesses can more effectively implement them, leading to higher revenues without compromising customer satisfaction. Here are four common places to implement demand-based pricing.

• Highly Variable Demand

  Demand-based pricing is effective for goods and services marked by volatile customer demand, such as fashion apparel or trendy electronics. But businesses relying on demand-driven pricing strategies must be able to measure that volatility in real or close to real time. Otherwise, the adjustments will be too slow to capitalize on those demand swings. This real-time data is often collected and analyzed as part of a larger business platform, such as an enterprise resource planning (ERP) system with demand forecasting and robust sales analytics capabilities. These tools help ensure that demand is accurately estimated and tracked and that prices are adjusted accordingly.

• Perishable Products or Time-Sensitive Services

  Perishable goods and time-sensitive services are especially suited for demand-based pricing due to their limited availability and their short shelf life. For example, in the food service industry, businesses can adjust prices for low-demand goods to sell stock before it spoils, preventing a total loss. By contrast, time-sensitive service providers, such as airlines and event venues, often raise prices as the service date approaches, reflecting the higher value of last-minute bookings. However, businesses must be careful not to raise prices too high, as unsold seats won’t earn any revenue once the plane takes off or the event starts. With careful demand monitoring using ERP software, businesses can minimize these losses and increase revenue.

• Ecommerce and Online Services

  Due to the agility and flexibility of digital platforms, ecommerce and online services are common candidates for demand-based pricing. These platforms give businesses the tools to swiftly make adjustments, and some leverage automation to seamlessly change prices during periods of rapid demand flux. This flexibility is crucial for businesses with online marketplaces, where viral products can shift consumer trends nearly instantaneously and competition is just a click away. For instance, online retailers may offer dynamic discounts on high-traffic shopping days or use personalized pricing based on a user’s purchase history. Similarly, software-as-a-service (SaaS) companies can adjust subscription rates in line with market demand to optimize revenue. However, these real-time pricing strategies hinge on robust data analytics and a transparent approach to consumer behavior to navigate pricing and maintain a competitive edge.

• Market With High Competition

  In markets saturated with competitors, demand-based pricing can be a strategic tool to stay relevant and gain customers’ attention. This approach lets businesses adjust their prices relative to the competition and ensure that they remain attractive to price-sensitive consumers. It’s particularly useful in industries where products are largely undifferentiated and price is the main factor when customers choose which business to shop at, such as gas stations. For unique goods, higher prices can signify premium quality or extra features and help goods and services stand out from the competition. However, this strategy requires vigilance and a proactive stance on adjusting prices. With regular monitoring and modifications, businesses can avoid being undercut by competitors, while also ensuring that profit margins are high enough to remain successful.

How to Implement Demand-Based Pricing

Implementing demand-based pricing requires a strategic approach that involves understanding market dynamics, customer behavior, technological capabilities and more. This section outlines six steps business leaders can take to successfully implement demand-based pricing.

1. Gather and analyze data on customer demand patterns.

   The foundation of demand-based pricing rests on robust data collection and analysis, specifically data centered on customer demand. This information includes tracking sales trends and customer interactions and understanding the factors that influence why and when customers make purchases. Businesses can use this information to identify demand cycles and price sensitivity — critical metrics for setting prices that customers are willing to pay without harming margins. Advanced analytics tools can also segment customer bases to better implement targeted pricing strategies and more accurately forecast demand for proactive price adjustments in the future.

2. Define pricing objectives.

   A business’s pricing objectives are often tied to particular revenue goals, such as maximizing short-term revenue or building long-term profitability. These objectives may also include non-revenue goals, such as increasing market share or gaining a more advantageous competitive position. Each objective requires a tailored approach to how prices can be adjusted to reach the goal. For example, if the aim is to penetrate a new market and increase market share, prices may start low to attract customers away from the competition. Conversely, if the focus is on profit maximization, prices might be set higher during peak demand periods. Defining these objectives up front — and basing them on existing demand trends and data — can guide a business’s pricing strategies so that every price adjustment aligns with broader business goals. Often, however, these objectives aim for multiple goals, such as increasing profitability and market share simultaneously, so businesses should remain flexible and reassess their goals as time goes on.

3. Identify customer segments.

   Successful demand-based pricing hinges on the ability to identify and understand customer segments. By segmenting customers according to their needs, region, purchasing behavior or other relevant criteria, businesses can tailor their pricing strategies to match the unique demand patterns of each group. This segmentation facilitates precise pricing adjustments that can maximize revenue across different customer segments, while maintaining market competitiveness. For example, an electronics retail company may employ different strategies for different products. New, innovative products can be priced high and skimmed down as the demand from day-one customers wanes. Meanwhile, basic products that appeal to a broader customer base, such as cables and adapters, can be priced low to attract everyday shoppers.

4. Use tools capable of handling pricing algorithms and real-time data analysis.

   By leveraging sophisticated tools that can process complex pricing algorithms and analyze data in real time, businesses can reduce the guesswork involved in setting prices. These tools, often built into a full-featured ERP system, are capable of tracking market changes, sales history, profit margins and customer behavior, thereby helping business leaders make more informed pricing decisions. Automation and machine learning can also be used to rapidly implement price changes across multiple channels and provide businesses with the agility and accuracy required to effectively use real-time demand-based pricing.

5. Roll out the demand-based pricing strategy.

   After creating a road map for their new pricing strategies, businesses can begin rolling them out. This involves executing the pricing changes across a business’s sales channels, including online platforms, physical stores and third-party sellers. During this phase, communication is critical — both internally, to keep team members informed of any changes, and externally, to manage customer expectations. Many businesses choose to phase the rollout into manageable stages. This lets businesses test the waters with a select product range or customer segment before expanding a particular pricing strategy. Businesses can also gather data, assess the strategy’s viability and make necessary adjustments before rolling out a full-scale implementation.

6. Continuously monitor performance and adjust.

   Establishing demand-based pricing is not a one-and-done process. It requires ongoing monitoring and adjustments as market conditions and customer preferences evolve. Continual analysis of sales data, market trends and customer feedback helps keep decision-makers informed on the impact of pricing changes and ensures that they’re working toward their goals. Businesses should refine their pricing strategies over time to adapt to new competitive actions, changes in costs and shifts in customer demand. Additionally, by monitoring the results of pricing initiatives — both successes and failures — businesses can fine-tune their process to guarantee more accurate and successful strategies in the future.

Demand-Based Pricing Challenges

While businesses can gain significant advantages, in terms of revenue optimization and market responsiveness, with demand-based pricing, they must also be aware of the potential pitfalls. Here are five major challenges companies should be aware of, as well as strategies to overcome them.

Customer Perception and Satisfaction

Managing customer perception and satisfaction presents a major challenge, as it can be difficult to understand exactly how customers feel about a business or product. Customers may distrust or become frustrated with companies that frequently or arbitrarily (in the customers’ eyes) fiddle with prices. Therefore, it’s important for businesses to maintain transparency about pricing practices. This ensures that price changes are perceived as fair and reflective of the real value of the business’s offerings. Building this trust can be achieved through communication strategies, including making incremental adjustments, announcing changes before they happen and providing explanations about why prices are changing. Additionally, actively seeking customer feedback through surveys, reviews or follow-ups can help businesses make sure that customers feel heard and valued amid changing prices.

Complex Data Analysis and Management

Effectively implementing and maintaining demand-based pricing requires intensive data collection, analysis and management, an especially challenging task for small or new businesses without reserves of detailed historical data or the right technology. Proactively adjusting prices based on predicted demand involves interpreting vast amounts of data from various sources, including market trends, consumer behavior and sales history. Businesses must do more than just collect this data; they must also rely on internal talent to translate analyses into actionable pricing strategies. During the planning phase of a new pricing strategy, businesses should take note of their resources, capabilities and internal expertise to evaluate what they have and what they need in order to maximize the expected benefits from their new strategies.

Technological Infrastructure

For swift demand-based pricing adjustments, data is typically integrated into a larger technological infrastructure or ERP system. This way, businesses can gather, process and analyze large volumes of data in real time to quickly and accurately implement pricing strategies throughout their organization. The complexity of this task necessitates sophisticated data analytics tools and expertise, which can be a barrier for businesses without the necessary resources or existing infrastructure. However, with the rise of scalable, cloud-based ERP systems, many small and midsize businesses can access these tools to improve their demand-based pricing capabilities and better compete with larger companies.

Competitive Response

When a business adjusts its prices based on demand, competitors may react by altering their own pricing strategies, potentially influencing customer behavior and causing a price war. Businesses in a price war must carefully consider how aggressively or conservatively they adjust their prices. Without careful planning, margins can suffer, and businesses can quickly start losing revenue from low sales. Even when prices return to “normal,” customers may be driven away if those low prices rise too quickly. While businesses should keep prices flexible and responsive to competitors, they should also balance prices with cost and demand analyses that support the overall pricing strategy and business objectives, while minimizing harm to revenue.

Market Predictability and Volatility

Some industries have unique levels of predictability regarding customer behavior and demand. Accurately forecasting demand in a volatile industry can be a substantial challenge when planning prices, as any discrepancies between forecasted and actual demand can lead to missed revenue opportunities. Because of this uncertainty, businesses must remain agile and flexible when responding to any demand swings or market disruptions. However, some caution is warranted, as misinterpreting these changes can undercut sound strategies. For example, if a hotel doesn’t realize that a sudden spike in demand is the result of a local two-day convention, it may fail to reduce prices when the convention is over, pushing the following week’s guests to a more affordable competitor with fixed prices. Businesses should consider the specifics of their industry when finding the appropriate balance between risks and opportunities.

Demand-Based Pricing Examples

To put demand-based pricing into further perspective, consider wedding venues and vendors, which often use demand-based pricing based on both the season and the date of the event. The highest demand for weddings is typically from May to October, and service providers and event spaces tend to charge higher rates during those warmer months (at least in the Northern Hemisphere). Similar to pricing during seasonal trends, weddings usually cost more on weekends, indicating a consistent ebb and flow of demand. Additionally, these vendors and event spaces often offer bundled packages to pique demand for services and increase revenue per sale.

Public transportation is another common area for demand-based pricing, with higher fares set for rides during peak demand hours. For commuters in the New York metropolitan area, for example, the Long Island Rail Road and Metro-North Railroad increase fares based on time and direction of travel, employing general demand-based and targeted price discrimination strategies. Travelers can expect to pay higher fares when riding trains arriving in New York City between 6 a.m. and 10 a.m. or departing the city between 4 p.m. and 8 p.m.

Manage Your Pricing Data and Financials in One Place: NetSuite

To stay competitive in today’s ever-changing market, businesses need agile pricing strategies that keep pace with demand. With NetSuite Financial Management, businesses can keep all their financials in one centralized location, with real-time visibility into pricing and how it impacts performance. NetSuite’s ERP solution enables business leaders to accurately adjust pricing strategies across their organizations and swiftly respond to market changes and demand shifts.

Users can leverage NetSuite’s cloud-based platform to access their financial data anytime, anywhere — a crucial tool for making timely pricing decisions in an increasingly hybrid and online environment. The platform’s comprehensive analytics tools offer insights into customer behavior and market trends, empowering businesses to set prices that both meet customer expectations and drive profitability. By consolidating data across a business into one unified system, NetSuite turns the often-challenging task of pricing into a manageable, data-driven process that supports strategic business growth and long-term success.

By focusing on customer demand when setting prices, businesses of all sizes can maximize revenue and maintain their competitive advantage. But, to effectively execute demand-based pricing, businesses must deliberately craft strategies that prioritize agility and flexibility. This is often achieved by leveraging business platforms with real-time demand monitoring and robust data analytic tools. With careful design, implementation and ongoing monitoring, demand-based pricing can help businesses adapt to fluctuating market conditions, increase their margins and expand their customer base.

Demand-Based Pricing FAQs

What is demand-based pricing in hotels?

Hotels using demand-based pricing increase their room rates during peak seasons or special events, so they can capitalize on higher demand. In slower periods, on the other hand, hotels may drop prices to attract more guests. Hotels employ this strategy to maximize revenue per room and maintain competitive occupancy rates.

What is an example of a demand price?

An example of a demand price is the surge in ride-sharing costs during rush hour, when commuters are using these services at a higher volume. As the demand for rides increases, prices rise to balance the demand with the available supply of drivers, optimizing revenue and controlling customer wait times.

What is the demand price method?

The demand price method is a pricing strategy that bases the price of a product or service on current demand levels and their perceived value by consumers. For modern businesses, this method often involves algorithms and real-time data analysis to quickly adjust prices as market conditions change.

What is the key to demand-oriented pricing?

The key to a successful demand-oriented pricing strategy is understanding and acting on any changes in consumer demand. Businesses can analyze factors like product scarcity, competitive pricing and consumer purchasing behavior to better understand the value of their offerings and how much customers will be willing to pay. By optimizing prices, businesses can increase revenue without hurting customer satisfaction.