Dynamic pricing is repricing on steroids. Sales dropping after the holidays? Perhaps dynamic pricing is the answer. Demand spiking for a hot new product? Dynamic pricing could be an asset. Margins shrinking? Have you heard of dynamic pricing?
Dynamic pricing isn’t always about price slashing (Amazon) or price gouging (Uber). It doesn’t have to be that extreme, but it does always provide a big benefit for brands and retailers. Here are the pros and cons of adopting this pricing strategy that consumers can’t stop talking about.
Advantages of Dynamic Pricing
Let’s start with the positives, because, honestly, it’s more fun.
As a quick recap, dynamic pricing reprices SKUs based on complex pricing rules and custom attributes. This strategy allows brands and retailers to apply pricing rules to groups dynamically, automatically, and at scale. Pricing rules are more logic-based than rule-based, allowing for more customization to match current market conditions. Hence, repricing on steroids.
So then, what are the pros of dynamic pricing? Check them out:
More Responsive Repricing
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?
Dynamic pricing allows brands and retailers to apply pricing rules to groups dynamically, automatically, and at scale.
Ability to Maximize Profits
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 an increase 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.
Saves Time and Costs with Automation
As we 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.
A few quick stats: Forrester Research estimates that price optimization software improves gross margins by 10 percent. On average, a dynamic pricing strategy increases profits by 25 percent. 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.)
Who Uses Dynamic Pricing?
Perhaps you’ve thought to yourself: “Rule-based repricing is no longer compatible with my business. We need repricing to be more complex.” Maybe you have a job title along the lines of pricing analyst or category manager. Maybe you just need highly flexible pricing rules to satisfy your business objectives.
These are the folks who use dynamic pricing. They’re the ones who benefit from:
- Nested pricing rules – More detail in your repricing than a simple if-then statement.
- Dynamic grouping – Large product catalogs that take a lot of work to manually group and define pricing rules.
- Dynamic price guidelines – Compliance is a must, and pricing rules have to consider MAP pricing, MSRP, min-margin, and more.
Dynamic pricing opens up more opportunities to create a configurable, unique pricing strategy that suit your exact business needs, instead of trying to fit a square peg into a round hole.
Disadvantages of Dynamic Pricing
Ok, ok. So we said we were going to discuss the pros and cons of dynamic pricing, so now let’s finally get to the latter part.
Dynamic pricing is complex by nature. That means that this approach can be difficult to manage, whether ensuring consumers aren’t turned off by the changing prices or making sure your methods are scalable and the changes are made when you need them.
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 across brick-and-mortar and eCommerce channels.
The disadvantages of dynamic pricing include the following:
Negative Consumer Sentiment
Many retailers fear that customers 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.
Customers 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, customers end up paying different prices for the same goods anyway.
Risk of Price Wars
Some retailers worry that changing prices based on competitor pricing and other factors will force them into a profit 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.
What’s keeping you from implementing a dynamic pricing strategy?
Editor’s Note: This post was originally published in January 2015 and has since been updated and refreshed for readability and accuracy. Contributing writer is Matt Ellsworth.