Dynamic pricing is the way forward because it's a pricing strategy where prices change in response to real-time supply and demand.
Dynamic Price Optimisation Models are used to tailor pricing for customer segments by simulating how targeted customers will respond to any price changes.
It's a complex task pricing thousands of items in highly dynamic market conditions and this kind of modelling helps to forecast demand, develop pricing and promotion strategies, control stock levels and improve customer satisfaction.
85% of consumers believe that price impacts where and when they will make a purchase – so ignore this fact at your peril!
However, the key to price optimisation doesn't just lie in the speed of price changes, it lies in the accuracy and calculation of data.
1. Use Accurate Competitor Data
A well-balanced dynamic pricing strategy starts with your competitor data. This pricing data helps you establish the range of prices you can use to stay competitive.
Unfortunately, competitor data is not always perfect and missing or incorrect pricing data can be frustrating. Employing a savvy business analyst can go a long way towards keeping your data accurate and identifying illogical errors.
Collect as much raw data as possible, set up data cleansing, and then feed the "pure" data to the algorithms for optimization.
2. Test Your Prices
Once you have this “pure” data, you can start working on the optimal price for your products. Remember that behind every purchase decision, there are several factors that help determine the optimal price, such as brand value, shipping costs, competitor prices, price elasticity etc.
You can actually A/B test your pricing strategies. Analysing how different prices affect your bottom line, sales revenue, and conversion rates can help you find the optimal price for you and your customers.
Of course it's important to keep up with market changes but at the same time, it's just as important to test your prices.
If you find a price that wins a lot of sales for your products, take note of your competitors' prices at the time. If it's higher, you know you can command a price premium.
3. Be Dynamic, Not Discriminatory
Certain businesses use demographics to determine prices. As an example, if a potential customer visits a website using an Apple laptop, the prices would be higher than someone using a PC.
Prices might be increased if the customer lives farther away from a bricks and mortar store. Whilst this could be an opportunity, it's pure price discrimination – and wrong! It can also be illegal.
Instead of using individual customer traits and demographics to price your products, let the market and your internal business strategy dictate and justify prices. The market will determine the price, and it's up to you to follow that price or alter it to make a sale.
4. Try segmented pricing
Appeal to a larger market with segmented pricing. Have tiered prices from value through to premium in order to capture as much of the market as you can. You can offer lower and higher end versions of your product to bring in revenue from customers with differing budgets.
5. Use peak pricing
Peak pricing allows you to take advantage of fluctuations in demand, increasing prices when demand is high or when your competitors have low stock. Airlines and travel booking sites do this all the time. There’s no reason why a manufacturer launching a new component can’t use dynamism in their pricing.
6. Lastly, take you time
Yes, sounds strange (and not dynamic at all) to take your time with price optimisation. However, giving yourself time with each price change to measure the results is the best way to build confidence in your future pricing decisions.
Of course it's generally important to move fast, but continually changing your prices to keep up with competitors can be detrimental.
Make price changes a little more calculated and increase the interval between each change.
Doing this can help you measure your products' elasticities and help you understand where you have pricing power, or where you need to be more competitive to win over customers.
Pricing intelligence software and dynamic pricing allow you to monitor the competition and the market as a whole and incorporates other factors such as the level of demand and conversion rates.
When it's implemented correctly, dynamic pricing can appease your customers by offering optimised prices in accordance with your brand without killing your margins.
With the help of data cleaning and price testing, manufacturers and retailers of all sizes can grow to be as competitive as Amazon while turning impressive margins. The future of dynamic price optimisation is now.
The Strategy and Tactics of Pricing, Tom Nagle and John Hogan 2016
Pricing Strategy:tactics and strategies for pricing with confidence, Warren D. Hamilton 2014
Pricing for profit:how to develop a powerful pricing strategy for your business, Peter Hill 2013