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What’s it: Demand-oriented pricing is a pricing strategy in which a firm adjusts its price to fluctuations in demand. This strategy is suitable for several cyclical or seasonal products. Usually, periods fall into two categories: peak periods and regular periods.
Why did companies adopt it? Companies try to maximize profits by setting different prices based on their demand patterns. Consumers will pay different prices for the same product or service at other times.
How the demand-oriented pricing strategy works
You can see several industries implementing this strategy, such as the retail industry and the transportation industry. In peak periods, companies see high demand for products, and in regular periods, demand is low.
The periods may be days or even years. You may pay different prices for a train ticket during peak and regular hours. Likewise, hotels may charge different prices during the holiday season and regular season. You may find airlines offering low ticket prices during high demand and lower prices during regular seasons in the airline industry.
Considered factors in setting demand-oriented prices
Critical factors for consideration in setting demand-oriented prices are:
- Demand patterns. The company may divide it into two, peak season and regular season. For example, they charge a high price during the peak season and lower it during the regular season.
- Price elasticity of demand. It measures how sensitive demand changes when a company changes the selling price of its products. Setting high prices when demand is elastic will only drive customers away, and sales fall more drastically. Conversely, lowering prices when demand is inelastic will only go demand less.
- Market supply conditions. Companies not only consider the demand side, but they must also pay attention to supply conditions. For example, when the market is still in excess supply, setting a high price will only make customers go to competitors, even if it is peak season.
- Market competitive conditions, including the pricing strategy by competitors. Firms may be reluctant to lower their prices if competitors do not. It only encourages customers to switch to competing products.
- Consumer desires. If firms can identify consumers’ wants precisely, they may impose price discrimination. They charge high prices to consumers who are willing to pay high prices and low prices to others. Discrimination may apply based on customer groups, geographic areas, or time of purchase.