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Demand pricing is one of the wholesale pricing strategies used to optimize return on investment by calculating the actual demand for a product based on current market conditions.
Also known as surge pricing or time-based pricing, this approach to wholesale pricing is based on the idea that consumer acceptance determines the actual value of a product or service on any given day.
Demand pricing has long been used to set wholesale pricing for time-sensitive products. For example, holiday decorations are often listed for the highest price during the peak sales period leading up to the holiday. Prices tend to fall sharply either immediately before or after the holiday since the demand for these products drops off at that time.
The same is true for seasonal merchandise such as patio furnishings, winter clothing and gardening supplies. Consumers who are looking for a great deal on seasonal merchandise often opt to wait until the peak demand for these products has passed in order to get the best possible price.
In terms of service-related demand pricing, crowdsourced rideshare platforms such as Uber and Lyft utilize a real-time surge pricing strategy. During busy periods, pricing for rideshare services spikes, while prices fall when demand is low.
Demand forecasting is the practice of utilizing multiple data channels such as historical sales records to predict future customer demand for a product or service.
When historical sales data is available, demand forecasting can involve a thorough analysis of past sales trends. In an absence of historical data, metrics can be compiled from market research, expert opinions and a careful analysis of the specific variables that impact demand for a particular product.
For example, a food truck business could create a custom demand forecast by assessing the direct and indirect competition in the target market. The business could also consider factors that may impact the business such as weather trends, special events and seasonal population fluctuation due to post-secondary students, cottage owners and vacationers in the area. Other relevant factors may include local unemployment rates and income levels.
Creating an accurate demand forecast requires accurate data. Start by collecting as much hard data as possible relative to your particular product, and also gather data on similar products that provide valuable insight you can apply to your business.
Whenever possible, focus on a specific product rather than a product line, as this can help you identify emerging trends and opportunities to optimize your wholesale pricing strategies. If you sell winter accessories, look at how individual items such as gloves, scarves and hats perform rather than grouping everything into the same data line.
Review what your competition is doing, particularly if they include top-performing businesses that have a track record of success. Analyze when your competition makes use of demand pricing with sales and seasonal promotions, as this information may be transferable to your products. Be aware of your lead time, as this is a critical element in every successful demand forecasting model.
Demand pricing is a tried-and-true wholesale pricing strategy that can deliver maximum return on investment. Surge pricing lets you take advantage of market conditions in real-time, keeps your enterprise competitive and allows you to gather valuable data on your customers.
When there is a high demand for a product, consumers are often willing to pay a premium, and that means more profit for the seller. Using demand pricing to sell long-anticipated or trending products capitalizes on consumers' willingness to spend more money on a product they perceive to have greater value, such as items that are difficult to find or exceptionally popular.
While consumers are increasingly gaining acceptance of wholesale pricing strategies that include surge pricing, there is a fine line between pricing your products in a way that maximizes profits and setting prices that could be perceived as opportunistic.
The risk of consumer backlash over demand pricing is particularly high when it comes to products and services that are viewed as essential, such as food and consumable household goods. Using demand pricing in response to product shortages can be seen as price gouging by consumers, and that can tarnish your brand reputation. Worse yet, some governments have tough anti-gouging laws that assess severe penalties against businesses that use demand-based wholesale pricing strategies to mark up the cost of food, medical items and essential supplies.
One well-publicized example of a backlash over demand pricing occurred during the early stages of the COVID-19/novel coronavirus pandemic, which triggered global demand for N-95 masks, hand sanitizer and surgical gloves. Prices for these products skyrocketed on Amazon and many other online marketplaces, which led to an onslaught of angry social media posts and media backlash regarding demand pricing practices on essentials during a worldwide health emergency. Many governments enacted price gouging laws, and platforms were forced to implement policies restricting demand pricing on critical medical products.
And although most customers understand that demand pricing is a widely-accepted wholesale pricing strategy that creditable businesses use to manage profits, overuse of demand pricing can be a turn-off for consumers who view the practice as an example of corporate greed.
When used properly, demand pricing can be a smart wholesale pricing strategy for companies that offer seasonal products and services. The key to developing a smart demand pricing strategy is good data collection, careful market analysis and real-time tracking of consumer behavior.
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