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In some industries, pricing needs to move with the market at all times. Most of the time, this takes the form of dynamic pricing, which is the practice of changing prices based on market conditions.
Real-time pricing takes this further by allowing a business to adjust its prices in real time as demand and supply conditions change.
What is Real-Time Pricing?
Real-time pricing (RTP) is a pricing model in which businesses adjust their pricing immediately, as soon as a market change is detected. This ensures that the prices of products and services are always up-to-date and reflect current market conditions.
RTP is used in the utilities and energy industries, where the price of electricity is continuously adjusted to meet the current supply and demand. As a smart meter reads electricity consumption, the per-kWh price varies per hour based on numerous factors and is calculated in real time.
To instantaneously determine optimized pricing, several factors are considered, including:
- Supply and demand factors: How much of a particular product or service is currently in the market? What is the demand for it?
- Market conditions: What are current market trends and economic indicators such as inflation, GDP growth, interest rates, etc.?
- Price elasticity: How sensitive is the market to changes in price?
Since elasticity plays such a significant role in the equation, real-time pricing only works in industries where a few large companies dominate the market and can absorb short-term price changes.
If companies are threatened by other competitors entering the market, competitive pricing is best achieved through other means.
- RTP: The abbreviation for real-time pricing, often used interchangeably.
- Peak Load Pricing: A type of real-time pricing used by utilities in which higher prices are charged during peak hours, when demand is high.
- Dynamic Pricing: Real-time pricing is a type of dynamic pricing, but dynamic pricing does not always involve real-time adjustments.
Trends in Real-Time Pricing
True real-time pricing is still relatively new in the business world, but its use is rapidly increasing as technology continues to evolve. Gartner predicts that by 2025, major global retailers will use real-time pricing in retail stores to adjust prices to match changing demand.
With the advancement of the Internet of Things (IoT) and big data technologies like machine learning and artificial intelligence, businesses can now collect customer data in real-time. This enables them to adjust prices according to customer preferences and changing market conditions for even more precise pricing strategies.
Industries That Use Real-Time Pricing
Most companies don’t use true real-time pricing, as there are many factors that come into play, such as pricing elasticity and market conditions. And most businesses don’t need to meet real-time consumer demand, making an average price easier to use.
However, there are a few industries in which real-time pricing is the norm:
- Utilities: Electricity providers use real-time pricing to adjust their prices based on demand and supply.
- Transportation: Many transportation companies, including airlines and ride-sharing services like Uber & Lyft, use real-time pricing to ensure they are getting the most out of their services.
- Retail stores: Some retailers are beginning to use real-time pricing in-store and online to adjust prices based on what customers are willing to pay.
- Ad-supporting platforms: Companies that monetize through ads (including Google, Amazon, and Facebook) use real-time pricing to adjust their ad rates based on the current market demand and corresponding search volume for each specific keyword or instance.
- Ad and media-buying companies: Media buying is a real-time exchange between buyers and sellers, where prices are adjusted based on real-time bidding.
- Wholesaling: The wholesale market price of some goods and services can fluctuate quickly.
In the future, more companies will use this pricing strategy as the technology required for true real-time pricing becomes more widely available.
Benefits of Real-Time Pricing
Real-time pricing provides numerous benefits to businesses, including:
- Greater control over profits and margins
- Increased customer satisfaction (in some cases) through personalized pricing
- Better market intelligence by tracking the changing demand for products or services
- Improved cost efficiency by adjusting prices according to current market conditions
When businesses use a real-time pricing model as a demand response strategy, they don’t need to worry about changes in the wholesale price or market value of their offering. And they can maximize profitability during times of peak demand.
Real-Time Pricing vs. Dynamic Pricing
Real-time pricing and dynamic pricing are two similar concepts, but there are important differences between them.
- Dynamic pricing uses algorithms to adjust prices according to the customer’s willingness to pay and other criteria such as market demand and competitors’ prices. Real-time pricing is more precise, requiring instantaneous price adjustments based on continuous data.
- Consumers generally benefit from dynamic prices by paying less for goods during slow periods. Real-time price volatility for regular items would confuse and irritate consumers, making it harder to generate revenue.
- Dynamic pricing is often used as a competitive tactic, while real-time pricing is more of a necessity for certain companies (like an electric utility).
- Dynamic rates work well for just about any business that operates seasonally or with variable demand. Real-time pricing only works for businesses with high demand and few alternatives (e.g., taking a $100 Uber during a peak hour vs. walking to their destination).
Software for Real-Time Pricing
Setting up a real-time pricing system requires access to high-speed data processing and sophisticated analytics. This can be achieved with the help of software that is designed for the purpose.
In addition to an improved real-time pricing algorithm, other software features must include tools that allow businesses to review and adjust their pricing policies in a timely manner, as well as manage customer data.
Enterprise resource planning (ERP) software can be used to optimize real-time pricing. ERP systems are designed to provide an integrated view of a company’s operations and financial performance, enabling businesses to make better decisions about their pricing strategies.
ERP software is especially helpful when it comes to managing customer data, analyzing the impact of price changes on sales KPIs, and optimizing production levels.
Real-Time Pricing Engine
A pricing engine is a software tool that automates the process of setting prices for goods and services. It uses data analysis, algorithms, and advanced analytics to determine optimal pricing strategies in real time.
To implement real-time pricing within an organization, its pricing engine must have an optimal real-time pricing algorithm built into its core. This algorithm will enable businesses to make dynamic and up-to-date pricing decisions in real time.
Configure-price-quote (CPQ) solutions are also becoming an important part of pricing strategies. CPQ software helps businesses quickly generate accurate quotes and provide personalized prices to customers.
By leveraging real-time data, CPQ solutions enable companies to adjust their prices based on customer preferences, product configurations, and other criteria.
A billing platform is an automated system that makes it easier to manage invoices, payments, and customer data in real time. The platform can be integrated with other systems, such as ERP and CPQ software, for seamless pricing processes.
Billing operations are much more confusing for companies using the RTP model because they are unable to accurately predict the final cost of a transaction. Businesses using real-time pricing need a billing platform that is capable of handling real-time transactions and providing accurate invoices for varied hourly pricing.
People Also Ask
How does real-time pricing work?
Data collected for real-time pricing is used to set prices for goods and services in near real-time, allowing businesses to adjust their pricing based on changes in the market, customer demand, and other factors. These changes are reflected to the consumer instantaneously.
What is the difference between real-time pricing and day-ahead pricing?
The main difference between real-time pricing and day-ahead pricing is that the latter offers fixed prices for a specific time period. Day-ahead pricing involves setting prices for goods and services one day in advance based on specific market data and supply availability. This means that the price of a product or service will remain the same throughout the entire day, regardless of any changes in the market that may arise during the day.
What is RTP based on?
Real-time pricing works by using data from various sources, such as suppliers, market trends, and customer behavior to set prices for goods and services. The price for each item fluctuates depending on supplies, competition, real-time demand, etc.