Assortment Optimization

Dynamic Pricing: A Retailer’s Good Luck Charm

Most shoppers have experienced dynamic pricing at least once before. Different sectors like the airline and entertainment industries have been using it for years. But does dynamic pricing fit the hype it’s creating?

By now you know that dynamic pricing is a pricing strategy that allows a retailer to change the prices of their products in line with various external metrics, such as competitors’ prices, and internal metrics, such as traffic rates. One company has put the pedal to the metal for their dynamic pricing strategy, and that company is Amazon. Most people recognize Amazon as the ultimate destination to find the best deals on their products. But why is that?

Well, Amazon changes their prices 2.5 million times a day, constantly undercutting competitors to make sure they’re offering the best deals possible. This practice has led to lots of criticism of Amazon and dynamic pricing in general. Many speculate that dynamic pricing is complete price discrimination, killing profits for retailers and scaring customers away to competitors. We’re here to debunk these pricing myths, and explain why dynamic pricing really helps retailers offer the right price at the right time.

Myth #1: Dynamic Pricing is Complete Price Discrimination

If you are not familiar price discrimination, it is essentially a pricing strategy that offers the same product at different prices determined by individual factors such as how many times a customer has visited a page, where they are shopping from, or even what kind of device they are using. Basically, you’re offering two different people the same product at different prices. It’s deceptive, and sometimes even illegal.

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Many have slapped dynamic pricing with the price discrimination label, but it’s fairly inaccurate. Yes, dynamic pricing changes the prices of products, but not for individual users. Instead of changing product prices based on a shopper’s demographics, dynamic pricing changes product prices based on fluctuations of demand or supply. It isn’t crafted after the airline-industry idea of increasing the price every time someone visits, it’s crafted after simple economics.

Myth #2: Dynamic Pricing Will Kill My Profits

Going back to our example, dynamic pricing helps Amazon offer shoppers the lowest price at any given time. While this is great for shoppers, it has completely depleted Amazon’s profit margins. At margins under 1%, it’s safe to say this is not sustainable for any business to function. Therefore, many believe that a dynamic pricing strategy will have similar effects on other retailers.

While this is a valid concern, it is 100% preventable for retailers of all sizes. When integrated with an automated repricing solution, dynamic pricing doesn’t drain profits. Reliable repricers offer price guards to ensure your products will never be repriced below a certain threshold. That way, you will never take a loss on your products, and can still stay competitive and profitable.

Myth #3: Dynamic Pricing Scares Away Shoppers

Many assume that because a dynamic pricing strategy moves prices up and down, they will scare shoppers away with higher-than-usual prices to capitalize on demand. If many customers are visiting a site and people are viewing a product, the price will go up. Critics of dynamic pricing argue that this will discourage shoppers from shopping on your site, and will visit a competitor’s site instead.

Thanks to price guards, dynamic pricing strategies will never price above a certain threshold set by the retailer. This helps your repricer understand your brand, and will never price outside of these set limits. By doing this, you will  never have a price that doesn’t fit your brand, and you won’t shock shoppers with your prices.

These myths bring up valid concerns any good business owner should consider when choosing a price strategy. However, like alligators in sewers or leprechauns, they are merely myths. When implemented correctly, dynamic pricing will not only avoid these retail catastrophes, they will prevent them from occurring altogether.

What are some other benefits of dynamic pricing?

Contributing Writer: Brian Smyth

Min-Jee Hwang

Min-Jee is the former Director of Marketing at Wiser. She has extensive experience working with SaaS companies and holds a BA from Carnegie Mellon University and an MBA from NYU Stern.

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