The Do’s of Dynamic Pricing: Lessons From Experienced Dynamic Pricers

You know what they say… it’s better late than never and sometimes being fashionably late has its advantages.

Retailers have recently caught on to the growing trend of dynamic pricing. While it may be newer to retail, there are a great number of industries that have a more established history of using such a strategy. Let’s take a closer look and evaluate the “do’s” of dynamic pricing from industries that have successfully implemented this pricing strategy for years.

One recurring theme we see is “looking at the bigger picture,” or considering external factors when applying dynamic pricing within these industries. Since the prices generated from dynamic pricing are calculated using some form of an algorithm, it is important to consider all of the aspects that may need to be incorporated into the formula.

DO: Determine Demand

Test:
Within the dynamic pricers in the hotel, transportation, and ticketing industries, we have seen an overarching pattern in their pricing strategies. Dynamic pricing should be utilized in the introduction of a new product to allow for prices to fluctuate as demand for the product is determined. Retailers can benefit from this, especially if they are constantly releasing new items. Since dynamic pricing reveals consumer demand at every price level, retailers can gain valuable insight on how price changes affect demand. Evaluating price sensitivity and elasticity can be essential to determining a retailer’s pricing “sweet spot.” For example, one retailer may find that a 5% price increase only negatively affects demand by 0.1% and actual makes more sense from a profitability standpoint, whereas another retailer may find that the same price increase affects their demand by -10%! They can also see if a product has an overall low demand before they mass produce it. Retailers can then observe whether or not the market is receiving the product well and decide to stop producing it before running a loss.

Predict:
In both the hotel and Think_Bigger,_Make_Better_3_860_484ticketing industries, we can see that rates and prices skyrocket near holidays and special events (championships, New Year’s, conventions, etc). This occurs because firms know that there will be an influx of people visiting or attending these events, significantly increasing the level of demand for their goods and services. They are using predictive analytics, the statistical analysis of past and current facts to make predictions about the future, and real-time data to help implement and enforce their dynamic pricing strategy. Retailers could also use predictive analytics and real-time data to access what may happen in the near future in order to adjust their prices. For example, since there has been an ongoing trend that the demand for clothing and electronics notably increases during the holiday season, retailers should incorporate this fact when designing their pricing strategies for those months.

DO: Monitor Buyer Behavior

From the ticketing industry, we see that when a company or large group purchases tickets all at the same time, it causes the computer to overestimate the general public’s interest in the event and raises prices. Retailers could also see bulk orders when consumers are purchasing customized items or a specific good that will be given to large audiences to commemorate an event. These orders will cause the same effect and require retailers to recognize the implications of these orders before adjusting prices.

In addition to this, retailers should consider offering discounts to consumers who make bulk orders. Generally, as the quantity ordered increases, the price per unit decreases. This allows for market segmentation based on consumer preferences. Depending on the amount that the customer orders, the retailer could charge different prices, maximizing profits.

DO: Utilize Peak User and Buyer Times

Have you ever noticed how train tickets
cshopping-bagsan be higher Mondays through Fridays during rush hours and weekends? The transportation industry sometimes implements dynamic pricing during peak user hours in order to maximize revenue (while also managing demand). Following in their footsteps, retailers should not only examine the current trends, but forecast upcoming ones to determine their pricing strategy. This could mean increasing prices for merchandise that generated a large amount of buzz within the market or that corresponds to a trending topic. However, keep in mind what was mentioned above; changing these prices prior to the trend or event is important, but be tentative about raising prices after an increase in demand due to the event.

During months where there are little to no tourists, or no major events, hotels tend to lower the prices of their rooms. Similarly, ticketing industries lower prices for sporting events when a team is playing a weak opponent. Both of these industries are working to fill capacity to prevent a loss of revenue. They are using dynamic pricing to manage their level of demand. Retailers can adopt this strategy when they have excess inventory. Lowering prices will increase the amount of volume sold, increasing profit. Alternatively, when retailers notice that certain products are extremely popular and are being bought quickly, they should raise those prices in order to maximize profits.

DO: Keep Consumers in the Loop

When promoting tickets, firms explicitly state how long the promotion will last and the day that the prices will revert back to normal. This is done to protect their brand value and to avoid upsetting customers. Retailers should also clearly state how long price changes are effective when they have flash sales and special promotions. Not only can this protect brand power, it can also create a sense of urgency within consumers, causing impulse purchases.

Why Dynamic Pricing Matters for Ecommerce

Learning from other industries provides retailers with more insight and direction on how they should carry out their own dynamic pricing strategy. When executed effectively, dynamic pricing helps expand a retailer’s customer base and brings in higher profits in every sale. This results in stronger brand value and increased consumer loyalty.

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Not sure how to get started? With built-in repricing rules, WisePricer has the ability to inform and adjust prices according to your competition, sales performance, conversion rate, traffic, time of day and more. Retailers can set their own customizable repricing rules, or utilize Wiser’s proprietary dynamic pricing algorithm designed by top industry experts, in order to execute their desired pricing strategy.

Are there other factors that dynamic pricers should incorporate into optimizing their pricing strategies? Sound off below!

Photo Credit: MFA Interaction Design
Photo Credit: Clip Art Guide

About Wiser

Wiser provides a complete suite of solutions to give retailers, brands, and manufacturers the edge to stay both competitive and most importantly, profitable.

Wiser’s core product is WisePricer, full-featured dynamic pricing and merchandising engine that monitors, analyzes and reprices retail products in real-time. WisePricer enables retailers to boost profit margins and revenue, price with confidence, and improve merchandising through powering the development of a sound pricing strategy.

Ready to try it out for yourself? Schedule a Demo or Sign up for a 14-day Trial online – No obligation. Learn how to win the pricing battle.

Contributing Editor: Amanda Lin

Arie Shpanya

Arie is the former COO, Executive Chairman, and Co-Founder of Wiser, a dynamic pricing and merchandising engine for online retailers and brands. He has extensive experience in business development with a focus on eCommerce (eBay and Amazon), and is a guest blogger on Econsultancy, VentureBeat, and more.

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