Dynamic pricing

Dynamic pricing means setting prices by models for each store, hour, seat or customer, and changing them as demand and rivals' prices move. The same item can have one price in the morning and another in the evening. Airlines, hotels and ride-hailing apps have done this for years, and shops and online sellers now do it too.

Here is how it works in general. The seller collects data on past sales, current demand, stock left, the time until the event and the prices of rivals. A model estimates how many units will sell at each possible price. The seller picks the price that gives the best result, such as the highest income or a full seat. The price is then updated in the system, sometimes many times a day. Limits are set, so that the price never goes below the cost or above a rule.

The model needs a measure called price elasticity, which is how much demand falls when the price rises. A product with low elasticity, such as a last seat on a festival flight, can be priced high. A product with high elasticity, such as vegetables in the evening, must be priced low to sell. There are limits. A customer who sees two prices for the same thing may feel cheated. Rules can also limit prices. For example, India's 2025 guidelines for cab apps cap the surge fare at twice the base fare. Each state government sets the base fare.

Take, for example, an airline seat from Delhi to Mumbai. Two months before, it costs ₹4,500, and the day before a festival it costs ₹12,000 because few seats remain. Consider a ride-hailing app that raises fares during heavy rain, when many people want cabs and few drivers are out. Imagine a supermarket that lowers the price of vegetables in the evening so that they are not wasted.

Related pages are price optimisation, promotion pricing, hotel revenue management, competitor price tracking and demand forecasting. Because prices can differ by customer, regulators and customers sometimes object.

How is it different from a sale or a discount? A discount is a fixed lower price for a period. Dynamic pricing keeps changing the price, up and down, according to current conditions.