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Dynamics of Dynamic Pricing

Dynamic pricing is NOT new, and yes, it does predate the internet. In fact, dynamic pricing is actually the original pricing model used for all transactions – though “old time” dynamic pricing bears significant difference to the methods used today. The concept of the modern day price tag is said to have originated with John Wanamaker, a merchant from Philadelphia and owner of a department store called Oak Hall. Prior to the mid 1800’s pricing was largely a matter of haggling and negotiation – which resulted in prices being constantly adjusted based on any number of factors including who the customer was, how loyal they were, how much they intended to spend or how busy the store was at the time. The result was that two customers might have paid significantly different amounts for the exact same item. This is a prime example of dynamic pricing, where the pricing adjusts to changing circumstances in real time. Granted with this model there may not have been a fixed price point to begin with, but the dynamic aspect of pricing has obviously been around for quite a while.

John was concerned over the inefficiency that constant negotiations and haggling resulted in. He was also a firm believer that equality among people should be reflected in all aspects of life, including how much they would pay for goods. His solution was to introduce the modern day pricing sticker, with a fixed, listed price for every product in the store. At first glance, this seems like a great system to set up, with everyone knowing exactly what things cost and no need for staff to be constantly involved in negotiations with customers. However, why should everyone always pay the same amount? Why not allow the laws of supply and demand play a part in pricing as well? Why should a loyal customer pay the same as a bargain shopper, or why would a customer purchasing 20 items pay the same price per item as a customer only purchasing one?

The truth is, “the sticker price” has actually always been an illusion, and dynamic pricing (of a sort) has always been going on, albeit in a less visible fashion. Using loyalty discounts, promotions, coupons and markdowns, retailers have always had an element of dynamic pricing present. However, is pricing in this fashion actually “dynamic”? When we use the term dynamic pricing today, we’re not just referring to pricing that adjusts, we are looking for pricing that intelligently adjusts to market conditions in real time. Under the model noted above, while the actual pricing for each customer may differ, the entire process is still not really tied to actual supply and demand metrics and adjustments are not “intelligent”. A bargain hunter may have simply found a coupon and gotten a great price, while a long time customer did not find that same deal and paid a higher price.

Modern day dynamic pricing relies on data and technology to make adjustments – it’s pricing intelligence that takes supply and demand into account. With the advent of the internet and the wealth of data available about pricing, inventory, competitors, and consumers, retailers now make adjustments based on real time market conditions. Repricing solutions allow retailers to set conditions and triggers that will automatically adjust pricing for a single item or an entire product catalog. Want to beat a specific competitor? Set your pricing rules to ensure you always out-bid them. Looking to boost profits when supply is low? Set a rule to automatically shift prices up if the competition runs out of stock. Need to clear out stock? Create a setting to price that product below the market rate.  Now THAT is real dynamic pricing.

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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