Want to change your prices in real time to adjust to market conditions? Want to keep up with your competitors at all times? Well, dynamic pricing might be the answer.
Dynamic pricing, also referred to as surge pricing, demand pricing, or time-based pricing is a pricing strategy in which businesses set flexible prices for products or services based on current market demands.
Ecommerce companies are able to change prices based on algorithms that take into account competitor pricing, supply and demand and other external factors in the market.
How Dynamic Pricing Works
With dynamic pricing your prices change in response to real-time supply and demand. Dynamic pricing will allow your ecommerce company to remain competitive with 24/7 price monitoring and changes, and could substantially boost your profits.
Dynamic pricing also provides ecommerce companies with additional insights on market trends. Retailers can implement different price levels and observe price elasticities before finding the optimal market price.
Amazon uses dynamic pricing and changes its prices on average every 8 minutes. Walmart, a leader in the loss-leader pricing strategy, changes its prices roughly 50,000 times a month.
Here are the top dynamic pricing tactics for Ecommerce Companies:
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.
Time-based pricing allows ecommerce companies to adjust prices according to the time of day or how long a product has been on the market. Retailers can increase the demand for an older product by marking it down.
You could 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 could offer lower and higher end versions of your product to bring in revenue from customers with differing budgets.
Are you trying to introduce a new product to the market but unsure of how consumers will receive it? Penetration pricing will allow you to set a lower price than the eventual market price in order to persuade consumers to try your product.
Not only will this attract consumers to your store, it will take them away from your competitors. You can then gradually increase prices as the item becomes more popular.
The key to dynamic pricing doesn't just lie in the speed of price changes, it lies in the accuracy and calculation of data.
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 unfortunate – and costly. Collect as much raw data as possible, set up data cleansing, and then feed the "pure" data to the algorithms for price optimisation.
Test Your Prices
Once you have this “pure” data, you can start working on the best and most competitive 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.
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 premium price.
Dynamism Not Discrimination
Certain ecommerce companies use demographics to determine prices. For example, if a potential customer visits a website using an Apple laptop, the prices might be higher than someone using a PC.
Prices might be increased if the customer lives farther away from a highstreet store. Whilst this could be an opportunity, it's actually price discrimination and not a recommended strategy.
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.
Take Your Time
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.
Is Dynamic Pricing For You?
By pricing products based on market demand, your company has the potential to enjoy greater profitability on each item. Just because prices can move down with dynamic pricing doesn't necessarily mean profits also decline.
Andale, an auction management company, surveyed eBay's online sellers. The average margin was 40%. Sellers benefit from a bigger pool of potential buyers, and buyers benefit from increased choices.
The price changes involved are controlled by software. The software takes into account the level of demand, your competitors' prices, customer location, time of day and day of the week. By collecting and analysing data about a particular customer, a vendor can more accurately predict what price the customer is willing to pay and adjust prices accordingly.
Amazon, with its data-driven approach, still reigns supreme with its dynamic pricing techniques. They have aggressively pursued their loss-leader strategy: by intelligently lowering their prices in order to compete against other retailers, they have captured a huge market share. The sacrifice was their margins – but they can afford to do this.
Why use dynamic pricing now?
An increasing number of ecommerce companies are taking a leaf out of Amazon's book and are beginning to implement similar dynamic pricing strategies. Dynamic pricing gives retailers of all sizes the opportunity to compete against a company as large and resourceful as Amazon.
Another advantage of dynamic pricing is real-time information about market forces. This information can let companies immediately see the effect of sales and marketing activities and allows them to fine-tune their production accordingly. It also provides warning signals concerning falling demand, reducing the likelihood of unsold stock.
Dynamic pricing enables retailers to capture the most revenue from their products. Retail Prophet reports “it enables a retailer to optimize their pricing based on real time inputs, as opposed to setting a price over the long term and either pricing too low and giving up margin needlessly or charging too much and losing sales.”
Can Dynamic Pricing Save your Ecommerce Company?
When it's implemented correctly, dynamic pricing can appease your customers by offering optimised prices in accordance with your brand without killing your margins.
Pricing intelligence software and dynamic pricing allow you to monitor the competition and the market as a whole and incorporate other factors such as the level of demand and conversion rates.
With the help of data cleaning and price testing, ecommerce companies of all sizes can grow to be as competitive as Amazon while turning impressive margins.
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