What is Dynamic Pricing?

By Moira McCormick on January 17, 2017

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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 you are looking for.

Dynamic pricing is spreading fast. Research organisation IDC forecasts that 20% of B2B ecommerce transactions will involve some type of dynamic pricing within a few years.  It's already a huge part of the B2C retail category – airlines and hotels use it all the time.

Why?  Well, dynamic pricing is a pricing strategy where prices change in response to real-time supply and demand and Dynamic Price Optimisation Models are used to tailor pricing for customer segments by simulating how targeted customers will respond to any price changes.

In a nutshell, dynamic pricing is an innovative, flexible pricing mechanism made possible by recent advances in pricing software that allows companies to immediately adjust the prices of their goods according to prevailing market conditions.

This kind of price 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 pricing revolution at your peril!

 

Is Pricing Software For You?

By pricing products based on market demand, companies have 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.

As mentioned earlier, 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.

If you're a retailer considering dynamic pricing, how do you find the middle ground? You don't want to frustrate customers but at the same time you don't want to undercut all of your competitors and harm your bottom line.

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Dynamic Pricing Requires Accurate Competitive Data

A well-balanced dynamic pricing strategy starts with accurate data on your competitors. This data helps you establish the range of prices you can use to stay competitive. Collect as much raw data as possible, set up data cleansing and then feed this "pure" data to the algorithms for price optimisation.

 

Dynamic Pricing Involves Constant Price Testing

The pricing software analyses how different prices will affect your bottom line, sales revenue, and conversion rates to help you find the optimal price for you and your customers.  Remember, the lowest price doesn't always win the sale and if you find a price that wins a lot of sales for your products, take note of your competitors' prices at the time. If your price is higher, you know you can command a price premium.

 

Why use dynamic pricing now?

An increasing number of retailers are taking a leaf out of Amazon's book and are beginning to implement the same dynamic pricing strategies. Dynamic pricing gives retailers of all sizes the opportunity to compete against a company as large and resourceful as Amazon whilst enjoying impressive margins.

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 they can 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 put it this way: “It enables a retailer to optimise 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.”

You can 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 possible. You can offer lower and higher end versions of your product to bring in revenue from customers with differing budgets.

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 also use dynamism in their pricing.

 

Monitor The Competition

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.

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.

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Related posts

How to Implement Dynamic Pricing Without Harming Your Bottom Line

6 Tips to Improve Your Dynamic Price Optimisation Model

 

Sources

http://www.brickmeetsclick.com/is-dynamic-pricing-the-new-normal-for-retail-

http://blog.hubspot.com/marketing/dynamic-pricing-without-sacrificing-margins-customers#sm.0000z04us8s0rekguzm14qff048sd

http://www.priceintelligently.com/blog/bid/198355/How-to-Implement-a-Dynamic-Pricing-Strategy-Without-the-PR-Backlash

https://econsultancy.com/blog/67699-how-online-retailers-can-improve-price-optimization-strategies/

https://econsultancy.com/blog/65327-why-dynamic-pricing-is-a-must-for-ecommerce-retailers/

http://www.bain.com/publications/articles/management-tools-price-optimization-models.aspx

https://www.quora.com/Whats-the-best-dynamic-pricing-optimization-solution-on-the-market

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

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