What is a price? It is the most significant barrier between a business and sales. It creates the highest friction between the company and customers. It is a metric that touches every part of the business. It is an economic foundation that has held for thousands of years.
Dynamic pricing is one of the reasons I got into Data Science. I started V Squared to manage perception of value. My thesis was businesses could use data to optimize their customers’ perception of value for their brand, products, and services. Pricing power is built on perception.
It is bounded by customers’ resource availability. Every customer segment has a finite amount of money to spend. Customers create budgets and allocate some part of their resources to the product category. Businesses compete for customers and budget share by targeting the decision points around customer budget allocation and product selection.
This defines the first principles for supply, demand, and quantity demanded at a given price. The purpose of pricing strategy is to lower the barrier and friction created by price to optimize the balance between margins and revenue. Those two metrics are why pricing strategy is so complex and where I start to explain dynamic pricing.