Dynamic pricing: What it is & why your SaaS should use it

Many SaaS companies are stuck in a fixed pricing strategy. Did you know that opting for a dynamic pricing strategy might yield much better results in the long run? We'll tell you why. 

This blog post aims to give you an in-depth look at dynamic pricing. You'll learn why popular and thriving SaaS companies use it and how to implement it in your own SaaS product.

We’ll cover:

• A definition of dynamic pricing and the factors that influence it
• The mechanics behind dynamic pricing
• A list of reasons why your SaaS should use dynamic pricing
• A quick implementation guide 
• Common pitfalls and how to avoid them
• Some real-life examples of SaaS companies that use dynamic pricing

Let’s get started.

What is dynamic pricing?

Simply put, dynamic pricing is a strategy where businesses adjust their prices for products or services in real-time. Instead of sticking to a fixed price tag, they let the price fluctuate based on what's happening in the market at that very moment.

If you've ever booked a flight or called a ride-share, you've probably encountered dynamic pricing without even realizing it. 

Think of it like this: It's kind of the opposite of a standard "set it and forget it" unchanging pricing model. With dynamic pricing, businesses analyze data using algorithms to figure out the best price to charge at any given moment.  

What factors influence dynamic pricing?

Several factors play into these price changes:

• Demand: When many people want something, the price might increase. Conversely, if demand is low, the cost could drop to attract more buyers.
• Supply: If a product is running low in stock, the price might increase to reflect that scarcity.
• Season: Some products or services are more in-demand during certain times of the year. Think about airfare during the holidays or hotel rooms during peak tourist season.
• Competitor pricing: Businesses often monitor what their rivals are charging and adjust their prices.
• Customer behavior: Sophisticated systems analyze individual customer data to help adjust pricing.

As mentioned above, algorithms play an essential role. Businesses gather information from various sources, such as sales history, competitor prices, website traffic, and even the weather.

They feed this data into specialized software that crunches the numbers and suggests optimal prices. These adjustments can happen in minutes, keeping the business agile and responsive to market changes.

How dynamic pricing works

Now that you’re familiar with dynamic pricing, let’s look at the frame of a dynamic pricing strategy to see how it works.

Data collection

Dynamic pricing is a data-driven approach, so the first step is to collect the information that will drive the price changes. 

Here's a snapshot of the types of data that feed into dynamic pricing engines:

• Consumer behavior: This includes what customers are buying, how much they're buying, and when they're buying. It can also encompass browsing patterns, abandoned carts, and even demographic information.
• Business costs: This covers everything from operational costs to marketing expenses and overhead. Changes in these costs can signal a need to adjust prices.
• Market trends: Are competitor prices changing? Is there a sudden surge in demand for a specific type of product? Market trends provide valuable context for pricing decisions.
• Economic conditions: Economic factors like inflation and interest rates influence consumer spending levels. 

Real-time data analysis

Once the data is collected, it needs to be analyzed in real-time. This is where the "dynamic" part comes in. Algorithms and tools are used to sift through this mountain of information and identify patterns and insights.

This analysis involves understanding the relationships between different data points. But the most important insight is how they impact pricing.

For example, a sudden spike in demand might indicate that a higher price can be charged without scaring away customers. Conversely, a drop in competitor prices might require a similar adjustment to stay competitive.

Automated price adjustments

The final piece of the puzzle is automation. Based on the real-time analysis, dynamic pricing systems can adjust prices to align with the ideal price points. There's no manual intervention. The result is businesses can react to changing market conditions faster.

The frequency of these price changes can vary. Some systems adjust prices multiple times a day, while others might make changes less frequently. The goal is to strike a balance between responsiveness and avoiding customer confusion.

Why your SaaS should use dynamic pricing 

By now, you should have a pretty good grasp of what dynamic pricing is and how it works. But the real question is: 

Why should your SaaS business care? 

Well, dynamic pricing isn't just a trend—it's a strategy that can unlock a whole new level of growth and profitability for your company. 

Let's look at the key benefits you could be missing out on:

• Cash in on demand: Dynamic pricing lets you ride the wave of fluctuating demand. If your product is suddenly the hot ticket, the price can rise automatically to bring in more revenue. If things cool down, the price can adjust to attract more customers.
• Stay ahead of the competition: Keep an eye on your competitors and the market with dynamic pricing. If they drop their prices, you can follow suit instantly to stay in the game. Similarly, if demand for certain features spikes, you can adjust accordingly.
• Happier customers = loyal customers: Pricing adjustments let you cater to different customer groups. You can offer discounts for longer subscriptions, special deals for certain groups, or custom pricing based on usage.
• Roll with the changes: The tech world moves fast. Dynamic pricing gives you the agility to react to market shifts, new competitors, or even economic fluctuations.
• Grow without the growing pains: Scaling your SaaS business doesn't have to mean a pricing headache. Dynamic pricing systems automate the adjustments so you can focus on growth without significant hiccups.
• Make the most of every customer: Not all customers are the same, and dynamic pricing lets you recognize that. Segment your customers into different groups and offer them pricing that makes sense for their specific needs and budget.

How to implement dynamic pricing in SaaS

Ready to make dynamic pricing a reality for your SaaS company? 

1. Make sure you’ve got the right tech infrastructure 

First things first, you'll need the right tools. Dynamic pricing relies on a solid technological foundation to collect, analyze, and act on data. 

This means investing in:

• Data analytics tools: You'll need a way to gather data on customer behavior, market trends, and competitor pricing. This data can come from your website, CRM, marketing automation platform, and other sources.
• Pricing algorithms: These are the brains behind dynamic pricing. Algorithms use your data to calculate optimal prices in real-time. While you can develop your own algorithms, many SaaS platforms offer built-in or third-party solutions.

Consider starting with a dynamic pricing platform that suits your specific needs and budget. Many options are available, from simple tools for small businesses to enterprise-grade solutions.

2. Start with straightforward pricing and then go for something more sophisticated

When it comes to pricing strategies, it's often wise to start simple and gradually add complexity. 

Begin with basic models like:

• Time-based pricing: Adjust prices based on the time of day, day of the week, or season. This is a great way to take advantage of peak demand periods.
• Segment-based pricing: Offer different prices to customers based on demographics, location, or usage.

As you gather more data, you can try more advanced strategies like:

• Competitor-based pricing: Automatically adjust your prices to match or beat competitor prices.
• Value-based pricing: Set prices based on the perceived value of your SaaS's offering to different customers.

3. Make monitoring and evaluation an integral part of your strategy

Dynamic pricing requires continuous monitoring and assessment to make sure it's working correctly. Track key metrics like revenue, customer acquisition, and churn rate to gauge the impact of your pricing changes.

Don't be afraid to experiment and adjust. The goal is to find the sweet spot where your prices are profitable and attractive to customers. Regularly reviewing your data and algorithms will allow you to refine your approach and maximize the benefits of dynamic pricing.

Pitfalls you might encounter and how to avoid them 

While dynamic pricing offers a host of benefits, it's not without its hurdles. Being aware of these challenges can help you navigate them effectively and ensure a smooth implementation.

How customers perceive this change in pricing 

One of the biggest concerns with dynamic pricing is how customers perceive it. If not handled carefully, frequent price changes can lead to feelings of unfairness or manipulation. 

Customers may wonder why they're being charged more than someone else for the same product. This could have a significant negative impact on your customer trust and loyalty.

Solution: Transparency is key. Communicate clearly and openly with your customers about your dynamic pricing strategy. Explain why prices fluctuate, the factors that influence them, and the value they receive in return. Be open about your data-collection policies, too.  

Consider including a brief explanation on your pricing page or FAQ section. You could even offer personalized explanations for price changes within the app or via email to individual customers.

Be compliant with regulations to avoid nasty surprises

Pricing regulations can vary significantly across different regions and industries. It's essential to be aware of these regulations and make sure your dynamic pricing strategy complies with them. Failure to do so can lead to legal trouble and damage your reputation.

Solution: Research the pricing regulations that apply to your industry. Check if any new ones apply to the geographic locations where you operate. It's also wise to regularly review and update your pricing practices, as regulations can change over time.

Real-life examples of SaaS companies using dynamic pricing

Example 1: Adobe’s Creative Cloud

Adobe, the powerhouse behind the Creative Cloud suite of software, has embraced dynamic pricing. 

They adjust their subscription prices based on several factors:

• Location: Prices can differ depending on the country or region where the user is located. This accounts for variations in local economies and currency values.
• User status: Adobe offers discounted rates for students and teachers. They recognize that their needs and budget constraints differ from those of professionals.
• Subscription type: They offer various plans (individual, team, enterprise) with tiered pricing. The rationale behind this decision is to accommodate different usage levels and business sizes.

By tailoring their pricing in this way, Adobe can appeal to a broader range of customers and maximize their revenue.

Example 2: Airbnb 

Airbnb is another excellent example of dynamic pricing in SaaS. While they're mostly known as a booking platform, they also offer software solutions to help hosts manage their listings. One of these tools is a dynamic pricing engine.

This engine uses a multitude of data points to suggest optimal nightly rates for hosts. 

Factors considered include:

• Demand: How many people are searching for accommodations in the area on specific dates?
• Seasonality: Is it peak tourist season or a quieter time of year?
• Local events: Are there any concerts, festivals, or conferences happening that might drive up demand?
• Listing attributes: How does the host's property compare to similar listings? This means anything from amenities, location, and reviews.

By leveraging this data, Airbnb empowers hosts to set competitive and profitable prices, which results in higher occupancy rates and earnings.

Next steps

Now that you've explored the benefits of dynamic pricing for your SaaS business, you might be wondering:

How do I implement it without overwhelming my team or codebase? 

That's where Orb comes in.

Orb is a done-for-you billing platform designed to empower SaaS companies. We give them the tools they need to implement and manage their dynamic pricing strategy effectively. In fact, Orb’s latest update can be of tremendous help.

Here’s how: 

• Manage complex pricing changes: Migrate customers in bulk and schedule price changes in advance. You can also easily cancel or modify scheduled changes if needed.
• Gain full visibility and control over pricing: View and manage all plan versions in one place. Compare changes side-by-side before implementation. We give you granular control over legacy pricing structures.
• Get your entire team involved: Orb's intuitive UI allows technical and non-technical teams to manage pricing, reducing reliance on developers and streamlining the process.
• Use automation and integrations: Orb's webhooks trigger automated actions (like customer notifications). They integrate seamlessly with your existing tools and workflows.

Learn more about how Orb can help you set up and maintain a dynamic pricing strategy.