How Dynamic Pricing is Changing the Game in Real Estate

Key Takeaways

• Also known as surge pricing, dynamic pricing is a strategy wherein prices are adjusted to account for changing demand. 

• The aim of dynamic pricing is to maximize profits by modifying the price at times of peak demand or usage.

• Other factors in dynamic pricing can include developer reliability, exchange rate, construction stage, environmental infrastructure development, and more.

Those seeking to invest in the real estate market would do well to familiarize themselves with the term “dynamic pricing,” wherein pricing can fluctuate based on market conditions or other factors. It is an increasingly popular approach. But exactly what is dynamic pricing, how does it work, and what are examples? All that is covered below.

What is Dynamic Pricing?

Also known as surge pricing, dynamic pricing is a strategy wherein prices are adjusted to account for changing demand. The adjustment is automated, either fully or partially, and is often based on algorithms, machine learning, and apps, accounting for competitor pricing.

The aim of dynamic pricing is to maximize profits by modifying the price at times of peak demand or usage. In other words, increased demand for a product or service will generally raise the good’s price.

In addition to real estate, dynamic pricing is employed in many industries, including hospitality, retail, and travel. Ever checked the price for an Uber ride one hour and a few hours later the price has dramatically increased or decreased? That is dynamic pricing in action, wherein prices can constantly fluctuate, whether it is in hours, minutes, or days. 

The opposite of dynamic pricing is static pricing, which is what most restaurants, and some manufacturers, use, although restaurants are starting to get into dynamic pricing as well.

Dynamic Pricing Do’s and Don’ts

There are some general do’s and don’ts when it comes to dynamic pricing:

Do’s

• Emphasize the out-the-door price. Potential buyers do not look just at an item’s price, they consider taxes, any shipping costs, service charges, or any other fees that are added to the total sum.
• Factor in expectations. Retailers, for example, should carefully consider the purchase cycle’s length in addition to consumer expectations for a product to avoid consumer backlash. For example, retailers who increased prices on cleaning products during the thick of the pandemic were generally viewed as engaging in exploitative practices.
• Test and learn. Sometimes it takes some trial runs to get dynamic pricing just right. Set up a way to track progress, gauge the impact, and make fast adjustments when necessary.
• Map out the journey. It is essential to understand one’s competitive position in the marketplace and brand price perceptions. After that, plot out the dynamic pricing journey.

Don’ts

• Do not confuse consumers. While airfare changes are never a surprise, people expect a bottle of soda to be priced within certain parameters. So, be sure that all algorithm-suggested price changes line up with the company’s brand, objectives, and desired customer experience.
• Do not needlessly change prices. If product availability, costs, rivals’ prices, or demand have not changed, there is no need to modify prices just for the sake of doing so.
• Do not rely on subpar inputs. While today’s technology can handle accurate pricing management, bad data can waylay even the best dynamic pricing approach.  

How Does Dynamic Pricing Work in Real Estate?

The pricing of real estate, an inherently dynamic market, hinges markedly on varying factors. Key factors include market conditions, where the property is located, and what features the property offers.

Other factors in dynamic pricing can include developer reliability, exchange rate, construction stage, environmental infrastructure development, and more.

Taking those factors into account, though, many investors successfully put in place the appropriate strategies for dynamic pricing.

Benefits of Dynamic Pricing in Real Estate?

There are benefits when it comes to dynamic pricing in real estate, including attracting potential buyers. Investors and realtors can do this by getting to know their customer base better. Technology permits tracking the frequency and timing of purchases, the lowest and highest amounts paid for real estate, and a nuanced look at the demand curve. Such insight will help with the creation of the right pricing strategy, which can provide a leg-up on the competition.

Dynamic pricing also allows sellers to maximize their returns on investment. In other words, investors can use dynamic pricing to counter higher prices offered by competitors. Prices can be adjusted as dictated by the purchase models of prospective buyers.

Challenges and Considerations of Dynamic Pricing

Just as there are benefits to dynamic pricing, there are challenges and considerations as well, namely, transparency between sellers and buyers. If a potential buyer learns that a property is priced differently for a certain demographic, for example, there is a chance they will not be happy. Dynamic pricing is generally easier to digest if prospective customers feel as though the price they are paying is determined, at least in part, by their own choices. 

Determining the right pricing strategy can also be a challenge, although it is generally doable. The first step is to define the strategy based on the commercial or investment objective, then set competitive prices. Once the sale is made, other clients can be redirected and encouraged to buy property that has been challenging to sell.

For example, say a prospective client is looking to purchase an apartment. The price is more than they anticipated, but the developer, realtor, or investor can offer the same apartment — in another area where the price is lower.  

Types of Dynamic Pricing in Real Estate

There are various types of dynamic pricing strategies that can be employed, depending upon one’s goals:

• Seasonal pricing adjustments. During peak seasons, property owners can experience elevated demand for certain properties. For example, vacation homes or cottages are particularly popular in certain regions in late spring and throughout summer. This manner of pricing directly correlates with market demand, meaning that potential buyers have limited market options and comparisons.
• Price reductions for properties on the market for a long time. An old rule of thumb is that 90 days on the market renders a property stale. That is generally because the assumption is that something is wrong with it. Dropping the price to sell, or adding discounts, is another dynamic pricing strategy. When new properties show up on the market, prices of the older properties can be reduced to get rid of superfluous inventory.
• Pricing based on property upgrades.  Here, it is critical to know what upgrades increase home value. Once that is determined, the property can be priced accordingly, depending on the market, location, and other factors. For example, a finished basement can add up to $50,000 to the asking price.
• Penetration pricing. This approach is chiefly employed for new properties with lower prices, relative to the marketplace. It is usually employed upon a push to reach a substantial share of a market, with the aim of showing potential buyers their list of offerings.
• Segmented pricing. This approach is basically offering different prices for identical properties, targeted at potential customers who reside in varying geographical regions. Pricing differs based on the prospective buyers’ current location.  
• Random fluctuations in market conditions. With this approach, if property sales begin to tumble, investors can drop prices until they stabilize.

Is Dynamic Pricing a Big Factor in Real Estate Offerings?

It depends. Rather than dynamic pricing, real estate offerings from leading alternative investment platform Yieldstreet are backed by data analysis and can provide fixed, targeted yields. Such offerings include commercial real estate debt, which has closed more than $330 million in investments, and highly vetted and curated private real estate investing, with minimums starting at just $5,000.

Beyond the potential for steady returns, investments in real estate also serve to diversify investment holdings, which is essential to long-term investing success. Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. 

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

Summary

Advanced technology is upending the decades-long supply-side pricing model, which bases property prices on what similar properties cost. Dynamic pricing, with its more personalized approach, is on the cusp of disrupting real estate. There are major challenges, however, which is why it may be a smart move to also consider opportunities that do not rely on such pricing.