What Is the Demand-Based Billing Model & How to Use It?

What is Demand-Based Billing?

The Demand-Based billing model is based on the demand of the buyer and their perception of the worth of the item. This method is based on the buyer’s willingness to buy the item at different price points are compared before an acceptable price is established.

Demand is not always constant across markets and products. Demand and behavior of consumers keep shifting based on different parameters therefore pricing strategies that are based on demand have been used.

Prices Based on Demand

We’ll examine four popular demand-based billing techniques including price skimming and penetration private-based pricing and the management of yield.

1. Price Skimming

Price skimming refers to the process of choosing and charging the best cost of a product that consumers will purchase, and then pricing it lower as time passes.

A company may determine the cost of its product as excessively expensive initially and then, as competition is created and the consumers’ surplus shrinks, the business will gradually bring its price down to satisfy a growing priced-conscious customer base.

This strategy is typically employed by those who develop new technologies. When competitors in these areas are catching up or offering their options the innovators who invented them have to change their prices to keep pace with the competition.

2. Penetration Pricing

Pricing for penetration is the practice of attracting buyers to a particular product or service by reducing the value of its initial offer and setting prices at a low level. The aim is to alter an impression of the product’s value relative to its competitors.

It’s an approach based on the belief that lower prices can help increase awareness of your brand as well as when your brand can garner the attention of customers and can retain customers who decided to take a chance with the product regardless of price increases.

3. Value-Based Pricing

Value-based pricing refers to the process of valuing a product on the amount consumers believe they are worth. This concept is most applicable to products that are designed to improve an individual’s self-image. The price paid by customers is dependent on their opinion of the product’s value.

This is usually due to the quality of the merchandise. Value-based pricing drives what may seem like an extra exorbitant luxury product, However, given the range of applications, it’s an idea worth knowing.

4. Yield Management

Yield management is an approach in which a company that sells fixed inventory resources in a limited window of time, tries to set the price for its products to reflect the way that demand levels for it change as the period grows.

This is a common practice in the hotel and airline sectors since hotel reservations and tickets generally increase in price as the date approaches.

It’s based on the idea that the urgency and the lack of supply that are associated with a limited and time-bound supply of a product can weigh more heavily on consumers when availability decreases — which makes them more likely to pay more for it.

How Do You Use Demand Pricing?

If demand based billing model fits your business, then it may be a viable method to increase revenues. It’s even more efficient if your services or products are highly sought-after. Here are four steps to make the most value from dynamic pricing.

1. Set Out Your Goals

When you are pricing your goods or services, establish your business goals. This includes defining the reason your company exists and what it represents and what customers will get from your company.

Implementing demand-based pricing without answering these questions could confuse your employees, your customers, and the people you are working with.

2. Establish Your Pricing Strategy

Every business is unique and pricing strategies should not be either. Before you begin exploring the techniques that are based on dynamic pricing think about your primary strategy to draw and keep customers by establishing pricing.

For instance, if you want to get the maximum amount of traffic possible and also make a decent margin, you might consider the “high-runner” method. When you employ this “high-runner” strategy it is possible to sell most of your items less than your competitors, but your price some items more expensive to make a profit.

The reason for this method is that once someone purchases from you for the first time they’re less likely to search for the same products elsewhere.

Selecting the most effective pricing strategy for small business can serve as an indicator of your decisions and helps you to be prepared for success.

3. Decide and Implement Your Demand Pricing Strategies

After you’ve developed your pricing strategy, you must implement the methods to make it come to life. This is where the strategies for dynamic pricing–price distinction, price skimming, and yield management come in.

However, these strategies aren’t necessarily mutually distinct. You could choose to apply different strategies to make sure your pricing is aligned with your objectives.

4. Test Your Dynamic Pricing Strategies

It’s impossible to improve the quality of what you don’t evaluate. Before you can put your dynamic pricing strategy in place it is essential to have systems in place that track the sales.

Without monitoring sales, it’s impossible to make sure your strategy is achieving what you’re looking for. If you’re not getting the results you’d like to look into reevaluating your approach.

A Prime Example for Demand-Based Pricing

Industries such as transportation and aviation use demand-based pricing to their advantage. We have observed that train tickets in the festive season are higher than in the off-season.

In the same way, things such as air Condition and air coolers are more expensive throughout the summer season, as opposed to winter when demand for heaters and radiators is high and drives the cost of these products up.