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Modern Day Ecommerce Strategy: Dynamic Pricing

The rise of eCommerce has brought with it some innovative pricing strategies. Although some strategies such as pay what you want (PWYW) or name your price (NYP), are obviously not well-suited for all businesses, dynamic pricing is one that can be applied broadly and net benefits for both consumers and retailers alike.

The Consumer’s P.O.V

Consumers tend to balk when they hear the term ‘dynamic pricing’. They think it’s unfair or creepy and associate it with privacy concerns or businesses trying to optimize profit per specific user. However, the type of price discrimination that consumers fear is likely illegal according to the Sherman Antitrust Act and subsequent legislation. In reality, dynamic pricing can be quite consumer-friendly. The key for retailers is not to lose the trust factor. For example, customers will probably understand if prices may fluctuate due to inventory levels, type of product (perishability), seasonality, or competitor pricing, but not as much if it’s based on personal data (although loyalty programs may be a notable exception). For example, if you get charged a higher price at the same time as someone else, simply due to where you are located.

For retailers, at the root of it, dynamic pricing is really more about market benchmarking such as taking into consideration what competitors are doing or setting prices according to an optimal margin. Although it’s not always a race to have the lowest price, consumers can benefit from this type of strategy, as evidenced by the plethora of price-matching programs popping up.  Retailers who have a bottom dollar strategy can even help customers comparison shop by installing widgets on their website.  And consumers have no shortage of price comparison apps to choose from. Prices do tend to fluctuate more in online stores due to the ease of updating prices compared to brick-and-mortar stores. Yes, these price adjustments may mean someone is paying a lower price than you did last week, but it’s not much different from missing out on a temporary sale or promotion.

The Retailer’s P.O.V

The key to implementing a dynamic pricing strategy is having the right data. At last year’s Silicon Valley Comes to Oxford event, Michael Chui of the McKinsey Global Institute who has done extensive research on Big Data concluded that “The use of data and analytics, in general, is going to be a basis of competition going forward… Those companies that are able to use data effectively are more likely to win in the marketplace.”

Consumers are savvy and constantly utilize data themselves through price checking.  Retailers also need real-time data and analytics, particularly about their competitors in order to stay ahead of the curve. Price intelligence and repricing tools can provide fast and accurate pricing data and the ability to automate repricing based on specific pricing rules set by the retailer. Various providers of such platforms may include features such as the ability to set advanced repricing rules based on sales velocity or identifying profitability points from website data.  An increasing number of retailers are investing in price intelligence platforms in order to successfully compete in the marketplace. Dynamic pricing technologies can have a direct impact on sales. On average, WisePricer’s clients saw a 22%+ increase in revenue, 7%+ increase in profit, 18%+ increase in checkout conversion rate, and an increased ability to respond to changing prices (48%+ faster response time).

Data alone is not enough. There must be a clear pricing plan and you must know what to do with the data. Although there are automated components to pricing platforms, the human element still comes into play. There must be someone behind the machine that ensures that the technology works in alignment with your business strategy. You want to automate as much as possible without losing control of your pricing strategy.  The best tools will have extensive customizable capabilities to set dynamic pricing rules (the ability to set specific strategies for specific competitors or set certain pricing strategies for specific segments of your product catalog, for example), and then automate from there.

The market is rapidly changing, and more and more retailers continue to adopt this type of strategy. For other retailers, will their pricing strategies leave them in the dust if they don’t adapt?

A Fine Line

(Although popularized by Spiderman) Voltaire wrote that “with great power comes great responsibility.” Data is a powerful tool. Dynamic pricing can be an effective way to optimize sales for retailers, but if it is not implemented responsibly or if it doesn’t support your overall business strategy, it can carry potential risks just as any pricing strategy can. Make sure your data is reliable and accurate.  Use your data responsibly and be aware of best practices. Make sure you don’t lose the trust factor and have a policy for evaluating and handling any customer complaints should they arise.

What do you think? Can dynamic pricing be mutually beneficial for both consumers and retailers?

For a more in depth look at the degrees of price discrimination, check out our accompanying guest post on Econsultancy.

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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