Want your pricing system to adjust to market conditions in real time? Want to keep up with your competitors 100 percent of the time? Dynamic pricing might just be your savvy solution!
Also known as demand pricing or time-based pricing, dynamic pricing is a variable pricing strategy which changes in response to real-time demand and supply. While it isn’t exactly a new pricing strategy (it was introduced in the early 1980s by American Airlines), it is taking different industries by storm, particularly the e-commerce and retail industry.
How Does Dynamic Pricing Work?
Simply put, dynamic pricing offers e-commerce retailers the flexibility to increase prices to boost profit when business is booming and decrease prices to boost sales when the business is a tad sluggish. This provides e-commerce retailers with valuable insights into the latest market trends, allowing them implement different pricing strategies and observe price elasticity or changes before adopting a specific market price.
Benefits of Dynamic Pricing for E-commerce Retailers
Automation is a major benefit for e-commerce retailers today. Whereas in a brick-and-mortar store employees have to physically effect price changes on a wide variety of items, e-commerce retailers can dynamically adjust the pricing without much costs. Some benefits of dynamic pricing include:
Ability to Quickly Adjust to Competition Pricing
Reports from a survey conducted by Ask Your Target Market revealed that 78 percent of consumers compare prices from different sources before making a purchasing decision. A retailer’s ability to quickly adjust prices to remain competitive is important. In fact, retailers who do not adopt competitive pricing strategies for their business may be penalized by Google Shopping. They may find their products at the lower end of ad listing.
Some of the biggest e-commerce retailers in the world have successfully implemented dynamic pricing. For instance, Amazon changes its prices every 8 to 10 minutes on average, and only last year, the company generated over $40bn in sales. This led to the company being named one of the top 10 e-commerce retailers in the US – for the first time!
Walmart, a leader in loss-pricing strategy, changes its prices an average of 50,000 times monthly. In 2013, they saw a 30 percent global online sales growth – a rate that surpassed Amazon’s sales margin for the first time in five years.
More Profitable Sales
By using data from dynamic price optimization, an e-commerce retailer can improve conversion rates and find the ideal pricing balance for their business. Feed advertising platforms such as Google Shopping provide instant feedbacks on market reactions to specific prices. A retailer can measure and optimize Impressions, Conversion Rates, Margins, and Click Through against advertising efforts in order to find the optimal pricing level at different times and in different markets.
Flexibility
Dynamic pricing promotes flexibility, allowing e-commerce businesses to target specific pricing goals. E-commerce companies can increase revenues, margins, and market share by adopting effective dynamic pricing strategies.
Top Dynamic Pricing Strategies
Time-based Pricing
Time-based dynamic pricing allows e-commerce retailers fluctuate their prices to adjust their pricing strategy according to different times of the day. Consider for instance, how pubs and bars offer a happy hour, at times when there are discounts on prices of foods and drinks.
Segmented Dynamic Pricing
Customer data can play a big role in dynamic pricing. For instance, if your target customers filled a survey indicating high income levels, you can adjust your strategy to adopt a premium pricing system.
Peak Pricing
Peak pricing refers to price changes based on current supply. It may make sense to increase prices if a company discovers they are unable to meet demands for a specific product.
Penetration Pricing
If you are trying to introduce a brand new product into the market but unsure of how it will be received by your target customers, penetration pricing can help. This system allows e-commerce retailers to set their prices lower than the eventual market price in order to compel consumers to try the product.
Dynamic pricing promotes creativity. As the e-commerce industry becomes more and more competitive, it is ideal that retailers are able to monitor their competition, using pricing intelligence and dynamic pricing strategies to drive measurable growth and stay ahead of their competitors.
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