What is Demand Based Pricing? - Best Hospitality Degrees

Demand based pricing is a particular pricing approach used in the valuation of many types of goods for the purpose of commerce. From television sets to the latest computer software, this type of pricing method can be seen in many places. Let’s take a closer look at exactly how this pricing concept works.

The World of Pricing

The world of pricing can in fact be quite diverse. When you purchase an item, its price has first been established by the seller and sometimes even the product’s manufacturer. In order to decide on that selling price, the seller or maker may take any number of approaches.

In competition based pricing, the price of an item is directly dictated by the element of competition the seller is currently experiencing from other sellers in the area. If few other sellers of this item exist, pricing can be taken exceedingly upward. If there are many sellers of that same item, the sellers then must be more competitive with their price points in order to draw the customer to them and away from the many other sellers.

Value based pricing is another method to creating a product price. Here, the seller or item’s maker pinpoint that item’s price based mainly on the value of the item. What does it offer the customer? How much of a benefit is this? What valuable materials and resources compose the item? The value provided is what decides price here. Value based and competition based pricing are only two examples of the various ways in which prices are created.

Prices Based on Demand

Unlike these other methods of price distinction, demand based pricing, or DBP operates dependent of current market demands. This system, often considered to be the fairest of all pricing methods, thus deviates and changes based on demand.

What is “demand”? Demand is the societal desire for having a product. If there is great demand for a particular food item, this means that there are many people purchasing or wanting to purchase the item. If a particular bread is manufactured at a rate of 1,000,000 loaves per day yet people would buy 2,000,000 loaves if they were made available, this product is then considered to be very much in-demand, or wanted by the masses.

On the other hand, if that same bread is actually made at the rate of 2,000,000 loaves each day and consumers only want around 1,000,000 loaves each day, it is not in high demand. Supply dwarfs the societal need, and therefore, demand is low in relation to available supply. Subsequently, prices drop because the item now exists in such common form – more than what is needed.

Real-Life Examples

Here are a few, real-life examples of pricing based on current demand.

In an attempt to price more fairly and subjectively, Disney Theme Parks recently introduced DBP at its parks. Now, visitors will be charged based on the cumulative demand placed on the park by visitor numbers at any one time. Fewer visitors call for less demand of the park, thus leading to reduced ticket prices. Many events and entertainment venues operate in this same, exact way.

San Francisco parking authorities also recently switched over to parking prices based on demand. In 25-cent increments, the hourly parking rates at applicable parking areas will now charge based on parking demand. If demand drops, so do parking prices. As demand thrives though and available parking spaces dwindle, the prices then begin to climb.

These two examples and our basic definitions here merely serve as a minute representation of the world of DBP. Oil, gas, dairy products, metals, lumber, tech gadgetry and countless other industries form prices based on the parameters of current demand. Pay attention to the prices of some of these areas and you will quickly start to see for yourself demand based pricing in motion.