It’s evident that retailers need to utilize dynamic pricing to compete successfully online, with players like Amazon dominating the space.
In this blog post, we’ll share how to implement dynamic pricing to get the best results for your business. Keep reading to learn more!
What is a Dynamic Pricing Model?
Modern-day dynamic pricing algorithms use price intelligence and competitive insights, along with supply and demand, to automatically update pricing. It enables retailers to optimize their prices based on real-time inputs and maximize revenue.
Dynamic prices can change alongside market demands or outside conditions, such as time or location. For example, a model could adjust prices at different times, like increasing prices closer to a sporting event or concert. Or, you could decrease prices for customers in specific geographic regions.
Importantly, dynamic pricing isn’t by random. It’s based on history and data science that supports how much shoppers are willing to pay based on these factors.
The main difference between dynamic pricing and fixed pricing is that dynamic pricing lets you be more flexible with your prices to better serve different consumers. While dynamic pricing seems intimidating, fixed pricing causes businesses to miss out on profit and potential sales.
Dynamic prices can change alongside market demands or outside conditions, such as time or location.
Is Dynamic Pricing Legal?
But is dynamic pricing legal? Yes, as long as the price changes don’t fall under the umbrella of price discrimination. You can’t charge different prices to customers based on a protected class, such as race, gender, or sexual orientation.
There are shades of grey with price discrimination so it’s always good to double-check the legality of any business model before moving forward. Dynamic pricing is legal when done properly.
Dynamic Pricing Steps
Are you ready to implement this strategy into your business? Here’s what you need to do so you can get dynamic with your prices and your consumers.
1. Align Strategy with Business Goals
As always, your business goals should align with your strategies. The same is true for dynamic pricing, you should ensure your dynamic pricing rules are aligned with your company’s goals.
For example, if your business goal is to be a low-cost provider, be sure your algorithm and criteria align with offering low-cost items by setting price minimums and maximums below your industry’s average price point.
All retailers should set pricing boundaries in their dynamic pricing model to ensure their prices align with their business goals and brand reputation. Setting price minimums is key to protecting your profit margins and ensuring you are maximizing revenues.
2. Consider All Pricing Factors
To successfully use dynamic pricing in a way that leads to long-term growth, you need to consider all variables. Price elasticity, changes in demand, and competitor pricing are just a few of the factors to keep in mind.
Measuring the price elasticity of demand for your products helps you determine how sensitive demand is to price changes. This allows you to establish a price range for elastic (sensitive) products when setting up boundaries for dynamic pricing.
Another factor to consider is the change in demand and seasonality of a product. Any change in demand, such as a volatile fashion trend, will require the pricing strategy to change.
Dynamic pricing guidelines should be in line with changes in the market. Pricing can jumpstart demand by attracting customers with low prices during the slow period while maximizing revenue with higher prices when demand is higher.
3. Competitors’ Prices
Your competitors’ prices are yet another factor to take into account—in fact, they are so important, they needed a section of their own. To build a successful dynamic pricing strategy, build an intelligent demand estimation engine fueled by competitor data.
Utilizing competitive analysis, you get an inside look at which of your products are priced higher, but are still winning the market—this is where you command a premium.
This can be due to excellent customer service or a unique value offered. By taking advantage of your price premium, you’re able to continue selling products at a higher price that customers are still willing to pay to maximize your profits.
Coupling competitive intelligence with elasticity, changes in demand, and historical sales is the beginning of an aggressive dynamic pricing strategy.
4. Use Clean Competitive Data
Reliable competitive intelligence data requires you to start with clean data. Data mining is no walk in the park if done manually; it’s time-consuming and the data is prone to human error. Not to mention, the prices will be outdated by the time you’re done manually mining data.
Reliable pricing software will ensure products are accurately matched from website to website, but mediocre software may contain mismatched products.
Inaccurate data leads to possible mistakes in pricing, such as accidentally pricing a $25 blouse at $75, which can turn shoppers away.
5. Test Pricing Strategies
Ultimately, retailers have the decision to build an in-house pricing solution or partner with a third-party algorithmic pricing provider. However, the leading reason to outsource and automate dynamic pricing is the ability to easily test pricing strategies to drive revenue higher.
By automating dynamic pricing and using a machine learning algorithm, you are able to completely remove human bias from your retail pricing. Additionally, using software makes it very easy to A/B test pricing strategies to optimize product pricing.
To succeed online, retailers should implement a dynamic pricing strategy. Utilize these tips to ensure your model is set up for correctly to get the best return on your investment.
Dynamic pricing is a powerful tool that maximizes your revenue and increases sales. Retail leaders have proven how effective it is and time is of the essence when it comes to eCommerce pricing.
Editor’s Note: Contributing writers are Matt Ellsworth and Patricia Montenegro. This post was originally published in September 2017 and has since been updated and refreshed for readability and accuracy.