Dynamic pricing is the concept of offering goods at different prices which varies according to the customer’s demand. The pricing of the product can be done on the basis of competitor’s pricing, supply, demand and conversion rates and sales goals.
Dynamic Pricing is becoming so popular that eCommerce markets are adopting it. In this article, we will give the ultimate guideline on eCommerce Dynamic pricing.
In the old days, static prices were the norm, since there wasn’t much machine algorithm. There were no chance to do research on how much a competitor priced their products and how you had to compete. But time and technology has changed now. The old strategy didn’t help retailers to make profits. But today, with dynamic pricing, you can find the profit, as they can perform pricing decisions using sophisticated calculations and predictions, by putting all available data into perspective, and change their pricing strategy to best adapt to a dynamic environment.
What is Dynamic Pricing?
Dynamic pricing is a strategy which enables businesses to provide flexible prices for products and services. It is now catching on across hospitality, retail, travel and entertainment industry segments.
Three factors include:
- Industry standards: In industry-wide average pricing; pricing ranges; most common prices among competitors
- Market conditions: Past, present, and future supply and demand; Consumer purchasing patterns/habits
- Customer expectations: How much your customers are happy and willing to pay; How much they expect to pay
Dynamic pricing is taking all three of the above-mentioned subsets and combining them into a single strategy.
The art of dynamic pricing is also referred to as individual level price discrimination, revenue management and yield management.
It is also referred to as real time pricing, wherein value of a product is determined by the current market conditions under commercial transactions.
While this model has been in existence for several decades, but it is now gaining momentum, and is likely to grow more pervasive in the years to come.
How does Dynamic Pricing Work?
Let’s see how dynamic pricing really works:
Dynamic pricing requires a lot of information about your industry, your competition, and your customers.
To collect, organize, and store this data is a task better suited for a computer; however, it’s up to your eCommerce marketing team to define what data they’re looking for, which pieces of info are most important or valuable, and how each data point should impact your products’ pricing. While dynamic pricing tools are made to suggest optimal prices for your products based on all of these data, such a vital moment again needs a hands-on approach from your team.
At any rate, the process of dynamic pricing on a single item involves many touch-points by machine and by human. However, not everyone’s process will look exactly the same; here’s an example workflow:
Must-have in Pricing Optimization
- Analyzing profitability
- Automated price management
- Forecasting upcoming price trends
- Customer analysis for personalized pricing
- Market analysis for different price competition
- Ability to adapt different situations and change
Core Functions in Dynamic Pricing
A. Information Gathering Functions
B. Internal Organizational Functions
What are the benefits of Dynamic Pricing?
Many retailers looking for pricing intelligence software that has the ability to scan Amazon for thousands of products every 10 minutes, reducing the burden of manually tracking competitors.
Dynamic pricing provides retailers with additional insights on market trends. Retailers can implement different price levels and observe price elasticity before finding the optimal market price.
Amazon, one of the largest retailers uses dynamic pricing and changes its prices every 10 minutes on average. The company saw a tremendous increase in sales since last few years. Thus resulted in Amazon being named one of the top 10 retailers in the US for the first time.
Walmart also changes its prices in a month. In 2013, its global online sales increase by 30%, a growth rate that topped Amazon’s for the first time in 5 years.
Another two big retailers, Best Buy and Sears also incorporate dynamic pricing into their pricing strategies. All of the companies has seen the growth of their sales.
Few Dynamic pricing pitfalls to avoid
There are some potential traps to avoid as you begin to implement dynamic pricing. While not a finite list, some of the most common mistakes companies make when implementing dynamic pricing which include:
1. Using a “Set it and forget it” attitude
Your pricing software will take care of everything but with a little mistake it can be a disaster. Let the computer do the grunt work, but make sure that you have hands-on-deck at all times.
2. Breeding indecision or distrust among-st customers
Fluctuating your prices regularly can cause your customers to try to “wait you out” for a better price in the days to come. It may also cause them to stop trusting your brand altogether.
3. Starting a race to the bottom
Just simply undercutting your competition could cause them to do the same. In turn, the perceived value of your product will ultimately fall.
Getting started with dynamic pricing
The main components of dynamic pricing as we’ve discussed so far are:
That’s all you need to get started.
1. Choose a dynamic pricing solution
Your pricing software should be:
- Thorough and
The solution should enable you to easily collect as much data as needed to strategically price a product; how to translate these data points into meaningful and understandable information; and be able to use this information to make automated pricing predictions for now and onward.
Your software of choice should also be very easy to use, come with free service offer and support, and of course offer a price that fits your company’s budget.
2. Gather relevant data for dynamic pricing
To implement your dynamic pricing strategies effectively, you need to work on data coming from a variety of sources.
In addition to everything you also need to look inward, as well.
Get specific data with your goals relating to profit margin, revenue, and company growth. Once you get these milestones, work out how you can use strategic pricing to help you reach them.
Without data to know where you’re going—and to know where you want to be—your dynamic pricing initiatives will have a tough time to gain.
3. Ensure you have the manpower to handle dynamic pricing
Despite the use of automation, adopting a dynamic pricing will likely require even more manpower than you previously had dedicated to your pricing initiatives.
Here are the top three reasons to use:
- Define all which your software will do in terms of collecting and processing data
- To take this processed data, along with any automated predictions or suggestions, and make a real-world decision regarding dynamic pricing
- To ensure that your automated software is fully-functional at all times, even when essentially on “cruise control”
While this extra use of human resources may be expensive for smaller companies, it will pay off in the long run when your use of dynamic pricing in retail prompt your company to massive growth.
How does one start to weave dynamic pricing into existing pricing strategies?
Here are the top dynamic pricing tactics for online retailers:
1. Segmented pricing
Appeal to a larger business with segmented pricing. Using this strategy, retailers have tiered prices from value to premium in order to capture as much of the market as possible. Apple already started using this strategy for its iPhones, creating a value product to complement its premium product. Apple also uses segmented pricing for their other products, fluctuating its prices according to how much memory each item holds.
2. Peak pricing
Peak pricing also allows retailers to take advantage of fluctuations in demand, increasing prices when demand is very high or when competitors have low inventory. Retailers could utilize this tactics during the holidays when consumers have high demand for various products while shopping for gifts. This could also be used when there is a special event like championship league approaching. Consumers would like to properly represent their teams with shirts, caps and more.
3. Introduce a loyalty program
Another fine way to bring in dynamic pricing is to introduce a multi-level loyal program which allows you to segment your customers into groups and implement different dynamic pricing tactics to each one.
For such instance of a loyalty program, Bronze membership is 10 percent cheaper than non-members, and Silver is 15 percent cheaper, and so on.
4. Demand pricing
Demand pricing takes into consideration and adds data related to demand into the mix.
Basically, this method uses the initially-defined prices as a “balance” of sorts, then increases or decreases the price according to the current demand. Again, it’s pretty: When demand is high, the price can increase accordingly; when demand is low, price should decrease accordingly.
The main problem with this approach is that it’s “faux-flexible.” You are fluctuating your prices in a strategic manner—but you’re still hanging onto a single price point as the “actual” price of your product. The reason this is such a big deal that will become apparent in a moment.
5. Perception pricing
With demand pricing, the consumer’s perspective pricing also can be considered when setting price points.
You might thinking about whether or not your target audience wants your product.
Here’s where things can be started.
You’re no longer shooting from the hip when increasing or decreasing your pricing.
Now, you’re considering factors such as:
- Product’s perceived value
- Target customer’s ability to afford your product
- Target customer’s willingness to pay more for your product
Retailers could also capitalize by slightly increasing prices to accompany the increase in demand.
- Time-based pricing. You know well what they say, out with the old, in the with the new. Time-based pricing allows retailers to adjust prices according to the time of day or how long a product or service has been on the market. Retailers can increase the older product demand by marking it down. Microsoft also used this strategy when pricing its game console, the Xbox. It originally had the Xbox 360 priced at $399, however when the Xbox One released, with motion sensing technology, the Xbox 360 was marked down to $299.
- Penetration pricing. Trying to introduce a new product into the market but not sure how consumers will receive it? Penetration pricing allows retailers to set a lower price than the regular market price in order to persuade consumers to try their product. Not only this will attract consumers to your store, but also it would pull them away from your competitors. Retailers can then gradually increase prices as the product becomes more and more popular.
Issues With Dynamic Pricing
Although dynamic pricing is very useful, but there are some issues that you should be aware of regarding its usage.
- With the same products available in the market at two different prices, a majority of customers will migrate to the store where the price is lower. Thus, the winning party will increase their sales and survive. This leaves an imbalance in the online market. This will continue until the next best price comes along.
- A split economy where two different prices of the same item exist isn’t going to see any growth unless it’s uniform.
- A system that’s dynamic can result in discrimination. You can’t have two prices on a single product for two different customers. But that’s ultimately here.
- The focus on key value items will leave other products at a disadvantage. With the decrease in demand for non-key value products, the customer will be benefited. However, the retailers will face a loss.
- Similarly, retailers who have goods at higher prices in physical stores and lower in online stores also run into a risk, since that persuades customers to buy from the online store and not from the physical.
In this modern age, prices cannot are set in stone. On the contrary, dynamic pricing is the present and as well as future of eCommerce.
To get the ball rolling with it, embrace a test-and-learn approach of regular data analysis and operational flexibility. Do testing and pilots to embed the solution into your daily workflow. Carefully select your dynamic pricing solution for calculations. Put the data into viewpoint and turn it into actionable insights. The more segmented and specific price you get, the better it will be for your competitiveness.
Make no mistake: this is a chance not only to optimize the product prices, but to swiftly respond to shifting customer preferences, dynamic trends, and competitive campaigns. Thus, if you really want to run business, you need to do your homework and outmaneuver companies determined to challenge you on the busy pricing front.
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