Demand-based pricing is a dynamic strategy that helps businesses optimize revenue by adjusting prices based on market demand.
Unlike fixed pricing models, demand-based pricing responds to consumer interest levels.
This flexible approach uses real-time market insights to drive pricing decisions, allowing companies to maximize profits during peak demand and attract buyers with lower prices when demand is low.
In this guide, we’ll explore the benefits of demand-based pricing and how different pricing methods work to maximize revenue and help businesses remain agile.
What is demand-based pricing?
Demand-based pricing is a pricing strategy that uses market demand to determine the price of a product or service.
Using a demand-based pricing strategy, a business will offer lower prices when demand decreases and higher prices when demand increases.
“Using demand-based pricing, businesses adjust their prices dynamically based on the demand for their product or service at any given time,” Doug Cunnington, Founder of Niche Site Project, says.
“Instead of having a fixed price, the price goes up when lots of people want to buy and drops when customer demand is lower.”
Demand-based pricing is similar to dynamic and surge pricing, which we’ll cover in more detail below.
Importance of demand-based pricing
A demand-based pricing strategy is important for businesses because it helps businesses adapt to consumer demand and adjust prices to maximize revenue.
Advantages of demand-based pricing include:
Maximized revenue
By raising prices during high-demand periods, organizations can capitalize on higher interest.
If companies don’t incorporate consumer demand into their strategy, they could set prices too low, potentially leaving money on the table during peak times.
“The big advantage of demand-based pricing is that it allows businesses to capture more revenue and profits when the getting is good,” David Hunter, Founder of Local Falcon, says.
“Being able to raise prices when a product is highly desired means you’re not leaving money on the table.”
Increased profit margins
Demand-based pricing leads to pricing flexibility during high-demand periods, allowing companies to capitalize on consumers’ willingness to pay more and boost profit margins.
“The big advantage is it empowers businesses to capitalize on high-demand periods and skim those surplus profits,” Doug says.
“It also gives them wiggle room to stimulate sales with lower prices when they need to move the merchandise. Ultimately, it’s a tool for boosting revenue and smoothing the peaks and valleys.”
Inventory management
Products may fly off the shelves during high-demand periods, but this isn’t the case when consumer demand drops.
Lowering prices when demand is low helps move inventory, ensuring continuous cash flow.
“Having the flexibility to drop prices can help move excess inventory and keep operations humming even in slow times.”
David Hunter, Founder of Local Falcon
Market adaptability
A demand-based pricing model enables businesses to adapt to market trends, consumer behavior, and seasonality, keeping them competitive and relevant.
“By being flexible and responsive to market conditions, [businesses] can optimize revenue and profit margins better than a rigid, one-price-fits-all model.”
Doug Currington, Founder of Niche Site Project
Demand-based pricing example
The airline industry is a great example of demand-based pricing in action.
Have you ever searched for flights and seen drastically different ticket prices based on days of the week, time of year, holidays, etc?
For example, if you fly somewhere on New Year’s Eve, rates may be super high due to many people flying during the holidays.
But if you book the same flight a week later, it will be much less expensive.
Demand-based pricing methods
Here’s a quick overview of various demand-based pricing methods and how they work to maximize revenue.
Price skimming
Companies use price skimming by setting a higher initial price for a new product or service in anticipation of high customer demand or early adopters.
As demand for the product or service decreases, the company will set different prices to meet this low demand.
Penetration pricing
On the other hand, using penetration pricing, a company sets a low price to attract a large customer base.
Companies may do this to generate buzz around a new product or service offering.
Price discrimination
Price discrimination uses customer data, such as willingness to pay, to adjust prices accordingly.
Airlines or hotels may use price discrimination and increase prices during the holidays or other busy travel seasons.
Surge pricing
In surge pricing, prices increase (or surge) when product demand is high and supply is low.
Ride-sharing apps may use surge pricing during rush hour or special events when many people need rides, and there may not be enough drivers to accommodate.
Dynamic pricing
Dynamic pricing is similar to demand-based pricing, using market trends to determine price points.
The difference between the two is dynamic pricing uses algorithms and data analysis to monitor and frequently update prices based on competitor prices, customer behavior, time of day, inventory, and more.
So, with dynamic pricing, you may see more frequent pricing updates than demand-based pricing.
Value-based pricing
Value-based pricing uses the perceived value of a product to determine the price.
Value-based pricing considers factors like customer service and convenience.
How much can a tool or product help customers or make their work or lives easier?
All of this is considered in a value-based pricing strategy.
Geo-based pricing
Businesses use geo-based pricing to adjust prices based on where customers are located.
So if someone is buying a product in a city where it’s very popular, they might pay more than someone in a different area where the product is less in demand.
Demand-based pricing methods
| Type | How it works |
|---|---|
| Price skimming | – Setting a high initial price for a new product or service in anticipation of high demand or early adopters – As demand decreases, companies will adjust pricing |
| Penetration pricing | – Setting a low price to attract a large customer base |
| Price discrimination | – Using customer data such as willingness to pay to adjust prices (e.g. airlines and hotels) |
| Surge pricing | – Prices increase when product demand is low and supply is low (e.g. rideshare apps) |
| Dynamic pricing | – Using algorithms and data analysis to monitor and frequently update prices based on competition, customer behavior, time of day, inventory, etc. |
| Value-based pricing | – Setting prices based on the customer’s perceived value of a product or service |
| Geo-based pricing | – Adjusting prices based on where customers are located |
What is the difference between cost-based pricing and demand-based pricing?
While demand-based pricing considers consumer and market demand, cost-plus pricing uses the cost to produce a product plus a small margin to determine pricing.
Using cost-plus pricing, a business calculates production costs, including manufacturing and distribution, and applies a markup percentage of its choosing to ensure profit from the product.
Cost-plus pricing is simple to use and calculate, but demand-based pricing offers more flexibility and greater profitability potential.
Cost-based pricing vs. demand-based pricing
| Definition | Cost-plus pricing | Demand-based pricing |
|---|---|---|
| Basis for pricing | Price is determined by adding a markup to the cost of production | Price is determined based on consumer demand and market conditions |
| Calculation | Calculate all production costs (manufacturing, distribution, etc.), then add a fixed margin | Adjusts pricing based on fluctuations in consumer demand and willingness to pay |
| Profitability | Ensures profit by covering costs with a consistent markup | Can potentially yield higher profits if demand is strong |
| Flexibility | Limited flexibility; does not account for changes in market demand | Highly flexible; can adapt to changes in demand and market conditions |
| Ease of use | Simple to calculate and apply; straightforward to manage | Requires analysis of demand, market trends, and sometimes consumer behavior. |
| Suitability | Best for stable markets with consistent production costs | Suitable for dynamic markets where demand fluctuates frequently |
How does CPQ support demand-based pricing?
Demand-based pricing is valuable for businesses because it allows them to adjust prices when needed and capitalize on consumer demand.
However, frequently changing prices can be a headache for sales teams.
CPQ (configure, price, quote) can help simplify this process and generate fast, accurate quotes.
CPQ software supports demand-based pricing by enabling flexible, real-time pricing adjustments tailored to market demand, customer needs, and preferences.
With CPQ’s dynamic pricing capabilities, businesses can implement customized price points and add-ons based on various factors—from customer segmentation to product configurations.
This adaptability helps sales teams adjust pricing on the fly, ensuring each quote reflects the most up-to-date pricing information and aligns with demand fluctuations.
Tools like PandaDoc CPQ do all this, plus track pricing data, providing valuable insights on pricing performance and customer behavior.
This data helps businesses refine pricing strategies to maximize revenue and customer satisfaction.
Maximizing market opportunities with demand-based pricing
By adjusting prices to meet demand, companies can capture more revenue, improve profit margins, and keep inventory moving.
Each pricing method within this strategy—from skimming to dynamic pricing—offers unique advantages, making it possible for companies to tailor their approach to their industry, target audience, and goals.
Disclaimer
PandaDoc is not a law firm, or a substitute for an attorney or law firm. This page is not intended to and does not provide legal advice. Should you have legal questions on the validity of e-signatures or digital signatures and the enforceability thereof, please consult with an attorney or law firm. Use of PandaDoc services are governed by our Terms of Use and Privacy Policy.
