What Are the Pros and Cons of Dynamic Fuel Pricing?
Have you ever researched the prices of flights and then looked again, closer to your departure date? If so, did you notice that the price had increased?
That, in a nutshell, is dynamic pricing. Dynamic pricing is the opposite of fixed pricing and will change according to various market conditions.
With increased volatility in oil markets, many companies are adopting dynamic pricing strategies. Is this the right move for you?
This article will address dynamic fuel pricing, explore its pros and cons, and demonstrate the results impacting the oil and gas industry.
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What is dynamic pricing?
Dynamic pricing (also called real-time pricing, surge pricing, or time-based pricing) is a pricing strategy. Changes in the prices of products, such as petrol or diesel, are made depending on real-time conditions. While there are extremes to dynamic pricing that can result in excessive price-slashing or price-gouging, dynamic pricing in general allows downstream energy producers to maximize profit margins when selling fuel.
Many variables within a market will cause prices to change. For dynamic pricing, it is typically algorithmic, based on market conditions. It could also be based upon seasonality (e.g., flight prices increase around the holidays). Supply and demand, levels of inventory, and competition can also play a role in dynamic pricing.
While a differential pricing mechanism sets prices based an individual customer profile or time of purchase (regardless of other considerations), dynamic pricing allows for instant flexibility to preserve margins.
What are the advantages of dynamic pricing?
There are many advantages to dynamic pricing, which explains why it is gaining popularity. Some of these benefits include:
Being able to earn higher profits is the best advantage of dynamic pricing. With the ability to raise or lower prices based on the market’s demand, dynamic pricing can lead to higher profits.
Dynamic pricing allows businesses to be more transparent with their rates, making dynamic price models easier for customers to understand. This transparency helps build trust among existing customers, as well as attracting new ones.
With dynamic pricing, you can either lower prices to move fuel while demand is low or raise prices when demand is high. Either way, the result is the same: more sales. Even in a slower market, you can still move your inventory because you can price your fuel at a point that encourages your customers to buy.
It is a fast-paced world out there, with changes happening hourly, not daily. With dynamic pricing, you will always be able to adjust your prices and maximize the number of sales instead of leaving money on the table.
Better inventory management
Dynamic pricing can help move underperforming inventory while setting a higher price on higher demand items. This is key during supply chain fluctuations, as it allows you to maintain space in your inventory or continue to meet your obligations if there are delays in your supply chain.
What are the disadvantages of dynamic pricing?
However, dynamic pricing does not come without its faults. As a result, there are some areas where you are wise to consider whether it is the right strategy for your company.
Imagine you went to buy a carton of milk, and the price was different each time you did so. Would that not be frustrating?
Customers hate dynamic pricing because it is just that – dynamic. It is going to change. However, when creating budgets and anticipating costs, consumers want a sense of stability. That customer may choose to purchase from a different provider. While you might have expanded your margins for now, your customer’s dissatisfaction may cost you more in the long run, and you should consider that carefully.
It encourages price wars
Have you ever seen two gas stations across the street from each other? One lowers its price, prompting the other to lower its price, and so on. This back and forth continues until one gas station can no longer sustain such low prices.
This example shows the danger of dynamic pricing. It can create a scenario where you may feel compelled to drop your prices lower than your bottom line can handle.
It can be difficult to manage
In order to successfully implement dynamic pricing, you must track numerous variables and market conditions to determine when (and by how much) to change a product’s price. Managing that volume of data can be complex and overwhelming.
Dynamic fuel pricing
On balance, the benefits of dynamic pricing are apparent in the fuel industry. Dynamic pricing allows fuel marketers to maximize profit and reduce loss due to suddenly fluctuating product prices. With dynamic pricing, companies gain more control over costs without sacrificing their bottom line.
As crude oil prices continue to fluctuate, the ability to respond to those fluctuations will help you hold onto–and even increase–your profit margins.
Of course, dynamic pricing is just one economic model available. There are others, and you should evaluate them all to ensure the right pricing for your fuel.
Having all the information
One of the disadvantages mentioned earlier was the sheer amount of data required to make dynamic pricing work.
However, this is one challenge you can successfully handle with the right tools.
DTN FastRacks has the most comprehensive data on the market today. With pricing information for roughly 800 branded and unbranded products at more than 1,900 terminals in North America, you can get accurate pricing comparisons and make your decisions with confidence.
Additionally, our data experts are on hand; waiting to give you the advice, support, and information you need. Customize the data you see to focus only on what is relevant for your markets. Not only that level of customization is available; you can also look at historical data and aggregate information to identify market trends before they arrive.
Correctly pricing your fuel is one of the most important aspects of ensuring success. Whether using dynamic pricing or another model, make those critical decisions based on accurate and comprehensive data.