Going Up, Coming Down: The Pros and Cons of Dynamic Pricing

What’s a retailer to do when the money stops falling out of the sky after the holidays? Well, looking back at them is actually a useful exercise that’s easier than your New Year’s Resolution.

During the holidays, when a certain doll is the hot item of the season (Frozen, anyone?), retailers can increase profit on that item by slightly raising prices to capture the extra margin they would have otherwise left on the table. Now that the holidays are over, some retailers are resigned to the fact that there is often a sales slump in Q1. But not so fast…

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There’s actually a way to take control of demand and get your sales back to where they should be. It goes by the name of dynamic pricing and you’ve heard about it before, but it isn’t always about price slashing (Amazon) or price gouging (Uber). It doesn’t have to be that extreme, but it does always have a big impact on retailers. Here are the pros and cons of adopting the pricing strategy that consumers can’t stop talking about:

Pros:

  • Price decreases are sometimes necessary and can often boost lackluster sales to meet revenue goals. Dynamic pricing accomplishes this by lowering prices to keep up with market trends, internal stock levels, and competitor data. This makes it possible to remain competitive within the market and move inventory faster when needed. What’s not to love?
  • The opposite is even more lovable because as we all know, dynamic pricing is about more than just price cuts. Many prices often could use a boost in price, say if the nearest competitor has a significantly higher price. Dynamic pricing is a way to maximize profit and revenue no matter what the circumstance.
  • As I briefly discussed, retailers that use dynamic pricing software are able to stay up to date on competitor pricing, pricing trends, and will never get left behind again. If you can think about manually repricing thousands of SKUs without your head spinning, then I salute you. For everyone else, the solution is pricing automation software.
  • Forrester Research estimates that price optimization software improves gross margins by 10%.
  • On average, dynamic pricing boosts profits by 25%.

Of course you’re most of the way convinced, but there’s no harm in a little social proof (like those handy customer reviews under each of your products.)

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Who’s Using It

Dynamic pricing is used in various industries. It has come a long way since it started in the airline industry and now extends to other forms of transportation and retail. Many bridges and public transit agencies have different prices for rush hour, off-peak hours, and even weekends.

These tactics aim to regulate the flow of traffic and sales. Dynamic pricing in retail follows a similar idea: if you need or really want a product, the price will be less of a factor (within reason).

Some retailers raise prices significantly when they are low on stock to prevent them from running out. This is similarly at play when Uber uses surge pricing: if you are willing to pay, then you will get a ride.

Ok, ok. So I said I was going to discuss the pros and cons, so now I’ll finally get to the latter part. Dynamic pricing can be difficult to manage, whether it be ensuring consumers aren’t turned off by it, or making sure your methods are scalable, and the changes are made in a timely manner. Because of this, many retailers have turned to technology to automate what was once a manual, time-consuming, costly process, especially for larger retailers selling hundreds of thousands of products.

Cons:

  • Many retailers fear that consumers will hate their new pricing strategy and choose to shop elsewhere. But did you know that with dynamic pricing software retailers can set repricing rules to ensure that their prices always match their brand identity? Something definitely worth thinking about.
  • Consumers can be scared off by frequent price changes, but it can be a win-win for retailers and savvy shoppers. Also, with sales and discounts, consumers end up paying different prices for the same goods anyway.
  • Some retailers worry that changing prices based on competitor pricing and other factors will force them into a margin depleting price war. Luckily, dynamic pricing software requires retailers to set floor prices to make sure that their prices never go below a certain price. This ensures that retailers will never sell below cost. Not all retailers can afford to pull a loss leader strategy like Amazon.

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You’re a smart retailer and you understand that shoppers are always comparing prices. How your products are priced matters most when matched up with the competition’s. So why not let your price do the talking and let it speak highly of you 24/7? Dynamic pricing can do that for your business and more.

What’s keeping you from implementing a dynamic pricing strategy?

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Need better data to inform your decisions? Whether in-store or online, Wiser has you covered from pricing to assortment to promotions. Schedule a meeting today to learn how to turn retail data into action.  

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Angelica Valentine

Angelica Valentine is the Marketing Manager at Wiser, the leading provider of actionable data for better decision, and a contributor to VentureBeat, Business Insider, The Future Customer Engagement and Commerce, and more. She holds a BA from Barnard College of Columbia University.