Dynamic pricing is a retail and e-commerce strategy that works on the principle of variable pricing rather than the more representative fixed pricing. With the advent of data analysis, data mining, data science, an optimum price is calculated in real-time. The price change is dependent on the product and nature of the business, but could be as often as every day or every hour or sometime every minute when it comes to eCommerce, hotel or retails industry. For example, Amazon, the global eCommerce shop, is one of the largest retailers to have adopted dynamic pricing and updates prices every 5-10 minutes.
If we track its history, it’s not a new concept, in the past, the price of a product was influenced by demand and supply in that area. But now more parameters are looked upon like What’s the competitor prices? How many products are left in stock on competitor site? Is the item perishable? Is it undergoing a re-branding with a new version available in the market? Such types of query decide the “dynamic price” it would carry for that moment.
Using the historical data, factors affecting its prices, geographies, days, consumers, and many more parameters are fed into the pricing model to get the price of a product at that moment. Dynamic pricing is a fully automated process helping online retailers to maximize their profits.
Why is Dynamic Pricing Important in E-Commerce?
One of the significant reason Dynamic Pricing is critical to e-commerce is its ease of use and automated tools that make pricing model quickly. Contrary to brick and mortar shops where you would need to update price tags of each item manually, online it can be handled dynamically at no extra cost. Let’s look at the advantages offered by Dynamic pricing to a business.
Greater Control to Pricing Strategy
As per a survey by Ask your target market 79% shoppers prefer to bargain for the prices, with dynamic pricing you can check your competitor’s pricing and offer a better deal to your consumer helping in getting better conversions.
Flexibility with Brand Value
If you thought your consumers might disown you with price fluctuations for a product? You seem to hit the wrong chord. Set the price floor that reflects the brand value and also keep you in profitable range, now based on other features like you are overstocked or there is a huge demand of a product, dynamic pricing could be adopted to earn you more.
Amazon saw a 27.2% increase in revenues using Dynamic Pricing and made to the top 10 retailers in the US for the first time.
Efficient Inventory Management
How often is an item in the list restocked and dump into the warehouse? Or for pharmacy shops, the medicines are at risk of expiry and cannot be sold owing to the loss to the retailer. With Dynamic Pricing, you would have a clear idea of what’s in stock and how many left leading to optimized working efficiency.
No Human Error with Automated easy to use tools
While an excel may be handy in putting all features, programming it, and getting the pricing model ready. The web scraping software is user-friendly and can monitor prices, calculate, analyze and manage complex data on a real-time basis.
Human error and guesswork are out; what is in your hand is precise and ready to be eaten information that can be pushed to live site straight away.
What are Different Dynamic Pricing Strategies
That’s the key question because the strategy you use would determine your revenue and growth and need to be chosen wisely. There is a lot of data that needs to be fed into algorithms to determine the final price of the item. Let’s take a closer look into different types of data sets that can help in deciding dynamic pricing strategies –
Supply and Demand in a locality
It’s merely a geography-based model; you may find a local fruit at a cheaper rate than getting it shipped 1000 miles. So the data set is mostly area, state, country, ZIP code, etc.
Have you seen a Wishlist feature offered by many retailers and Amazon for sure, the customer keeps adding the products, and when a slight decrease in price is shown, many customers buy it? So, such knack would help you not only win a customer but winning a happy and satisfied customer, as he purchased at a lower price.
Time-based dynamic pricing
The best example of time-based pricing is “bars/pubs and Happy hours” or discounting prices during the rainy season on a water park. So, if you find during office hours people are not getting onto shopping, how can you attract customer with offering time-based sale or cashback.
How often have you noticed the frustration of cab seekers when Uber and Ola show price fluctuations? But that’s a strategy when the inventory is not optimum, and there is a demand; you peak the prices and customer may get uninterested for some time until you arrange the stock and again show a lower price.
Have you ever fallen for the lowest price in the market trick? The same trick could be applied to your online retail store, feed the competitor prices into your pricing software and make sure your prices for that product are always the lowest, giving you an extra edge over your competition.
Segmented Dynamic Pricing
I remember one of my acquaintance who used to get jewelry from distant places at a very cheap rate, but all her clients were posh class and used to sell them at a reasonable rate. You can also use customer data and offer some unique offering at an exclusive price customized just for them.
This strategy is best suited to discount retailers and generic food suppliers where the product is kept at a minimal price or no-frills after reducing the cost of marketing and promotion. It helps in attracting price-conscious consumers and has an advantage in selling a large volume of product/services at an optimum price.
How to Implement Dynamic Pricing?
While implementing dynamic pricing, you need to adopt a slow and steady process not to incur losses in case an incorrect strategy is executed. Many factors decide a products price so start slow –
The Launching Price
It is the first step while launching a product what price would be tagged? It would decide the fate of the product on your retail store. So, the price is based on the base price, price of the product listed under the same category, profit margin you are aiming, and competitors pricing.
The Supply-Demand Pricing
The next stage is based on the demand and supply of the product, and price can be changed based on that. Both could have a positive or negative effect, so making the right decision and in case it’s not working switching at the right moment is critical. So in case you reduce the price, it would attract more buyers, but if you increase price there are also chances that consumers take it with good quality tag.
The Perception Stage
You might have observed “Best Selling products” in a particular category may be seasonal fruits or raincoats during the rainy season. This stage is the one that influences your sale to a large extent. You need to identify the best selling products, and promote them, run a campaign to derive more value out of it.
The Competitor’s Stage
No matter which industry you are, you need to deal with competition, and this stage is crucial for that. Make price adjustments based on data scraping from websites. As we saw earlier, bargain shoppers mostly look for the lowest prices.
The Omnichannel Stage
The consumer is not dependent on one device, they may use a computer in the office but while on the metro a phone would be handy and while traveling an offline mode, so make sure your pricing is same across all channels.
Quick Examples of Dynamic Pricing
Let’s take a look at some of the Dynamic Pricing examples that have influenced retailers and consumers to ask for more –
Happy hours offered by many bars and pubs across geographies is one of the ways to manage consumers and convert price-conscious customers. With more number of customers pouring in, with discounting could lead to more profits. And with time it has been proven so effective that every bar/pub now have mandatory happy hours.
Stock market or the value of a share is again derived from different parameters that are fed into the algorithms. Different parameters include the initial price, demand, the company’s performance, political stability of a region, and even the company’s decisions. And the price is adjusted to the most current situation.
Airline and Cab Rides
As a consumer, we all have faced this when multiple people browse for rides of similar location prices fluctuate every 10–15 secs. And then there is premium pricing for the weekend, holiday season and festivals.
Opting for a movie in morning hours may come at a discounted price than booking a ticket during the weekend after lunch hours. It again is the application of premium pricing strategy and time-based dynamic pricing.
Dynamic Pricing involves a lot of creativity, analysis, and homework. While automation, machine learning, and data science can help you as an owner still need to look for parameters that are affecting your products pricing. And once you get it right, you can get your profits soaring high in the sky.