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3 Factors Needed to Build a Perfect Dynamic Pricing Strategy

There’s an urban legend about an architect who built one of the world’s most lavish libraries. The building was world renowned and extremely beautiful. It attracted thousands of people to read, study, and appreciate its beauty. However, a major flaw in the building’s design was discovered: it was sinking into the ground. Despite its perfect artdeco design, the architect forgot a major factor: the weight of the books. Because he forgot this factor, he helplessly watched his library slowly sink until it was no longer accessible or useful for anyone.

This story teaches an important lesson: a project is destined to fail when you lose sight of its main purpose. The point of a dynamic pricing strategy is to change a product’s price in accordance with market changes. If you overlook important factors that affect dynamic pricing’s practicality, you are left with a fancy algorithm that simply doesn’t work. Anything can appear attractive in theory, but it’s up to you to assemble it properly. Here are three things you should never overlook to build a perfect dynamic pricing strategy.

Elasticity of Demand

If you’re familiar with economics, you’ve probably heard this terminology before. When you think of your product’s elasticity, think of it as a rubber band or a string of yarn. An elastic rubber band stretches and shrinks easily, indicating a change inflicted by an external factor. A string of yarn will not stretch with simple force.

When you’re implementing a dynamic pricing strategy, make sure your product’s elasticity is more like a ruler. What this means is that your product’s demand does not fluctuate greatly with a change in price. Since a dynamic pricing strategy involves constant increases and decreases in price, an elastic product can warrant disappointing results. Inelastic products will stay in high demand if the price increases or decreases, making the odds of scaring away customers that much lower.

Time Frames

Customers arrive in waves, and some time frames are busier than others. Unfortunately, there isn’t a universal schedule of tides for online retail. You’re going to have to measure your website traffic throughout the day to discover your busiest and slowest times. Doing this can help you capitalize on high demand and keep you from scaring away small trickles of shoppers.

A machine learning algorithm can help your strategy adjust itself based on changes in demand. The algorithm can detect different patterns in demand to build the ultimate pricing strategy. If data shows that customers are highly active on your site  on Tuesday afternoons, it will increase the prices of products. If your site is getting busier during a normally slow time, gradually increase the price to find the sweet pricing spot.

Competitors’ Prices

The ecommerce industry is a fast and furious one. Retailers can change prices of products multiple times a day. While it’s important to focus on internal factors, you need to keep an eye on the competition’s prices. Without competitor data, it would be impossible to benchmark against competitors and learn where you stand in the marketplace. A dynamic pricing strategy can help you change your product’s prices frequently, allowing you to keep up with other retailers.

Keeping an eye on the competition is crucial, but using your peripherals to examine your margins is just as important. Like changing lanes to get ahead of a driver, you need to watch your blind spot to prevent an accident. Automated repricers treat your pricing like a great game of ping pong. They can make sure your price won’t cut into your costs, no matter what your competitor’s price is. They can also set price guards to keep you from pricing too high out of your brand range.

A dynamic pricing strategy is one of the most useful tools retailers can carry in their virtual tool belt. It helps retailers stay competitive and profitable, without sacrificing margins or brand image. However, it needs to be done properly if retailers want to yield the best results. Don’t let your dynamic pricing strategy sink. Take important factors into account and keep it afloat.

Brian Smyth

Brian Smyth is a former content writer at Wiser, a dynamic pricing and merchandising engine for online retailers. He holds a BS in business with a concentration in marketing from San Francisco State University.

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