Developing a strong pricing strategy starts with an understanding of your competitors, your market, and the wider economy. Trying to price your products without this understanding is like trying to hit a moving target blindfolded. You might get lucky, but it’s more likely you’ll miss it completely.
The access brands and retailers have to retail analytics today is changing how they think about pricing. In the past, it was difficult to have all of the intelligence needed to make agile pricing decisions. Today, if you aren’t adapting to changing conditions as they happen, you’re likely losing.
In this article, we’ll look at fixed vs. dynamic pricing, and why retailers need to strongly consider how they can improve their ability to adopt dynamic pricing practices.
Fixed vs Dynamic Pricing
Fixed pricing, sometimes referred to as static pricing, is a pricing strategy where a retailer determines a fixed price point for a product and maintains it for an extended length of time.
The classic example here is the “everyday low price” retailer. These retailers understand their market deeply, determine what is truly a low price, and stick to everyday low pricing as a core strategic decision. They typically don’t have discounts or promotions as a result of their static pricing methods.
Dynamic pricing, sometimes referred to as demand-based or time-based pricing, is a pricing strategy in which prices adjust at regular time intervals in response to real-time supply and demand data.
Some examples of dynamic pricing can illustrate how it works:
- Amazon revises its prices every 10 minutes, and can even revise prices on a customer-by-customer basis based on supply and demand.
- Ridesharing services like Uber and Lyft use “surge pricing” during times of high demand, such as rush hour or right after a major sporting event.
- Airlines raise or decrease ticket prices based on how many available seats there are, the number of days until the flight, average cancellations, and several other factors.
As you might expect, there is no right or wrong pricing strategy that works in every single case. As a brand or retailer, you need to understand the advantages and disadvantages of each approach and find the best pricing strategy for your business model.
Advantages and Disadvantages of Fixed Pricing
One of the core advantages of fixed pricing is that your customer will know what to expect from you from a price perspective. Here are some advantages of fixed pricing:
- Cementing your brand as a low-cost provider. If you’re selling a commodity item like basics in apparel or items like toothpaste or toilet paper, being that go-to provider of low-cost items can be a competitive advantage.
- Maintaining value/luxury pricing. On the other side, luxury retailers win based on perceived value, which is signaled in large part through high price points. Keeping your price at a fixed point above the average is how you can maintain that brand perception.
- Getting greater predictability. When it comes to sales and profitability forecasting, fixed pricing makes it easy to forecast revenue based on seasonal buying patterns.
Fixed pricing can be the right approach for many business models, but with the rise of e-commerce and the ability of retailers and brands to access pricing data across entire marketplaces, fixed pricing can also bring some significant disadvantages, such as:
- Weathering the potential erosion of profit margins. If your fixed costs go up, but your prices are fixed, you either have to raise them and risk losing customers, or allow the higher costs to impact your profitability.
- Becoming susceptible to variable cost increases. Increased variable costs can also cut into your profitability if you are unable to change your prices.
- Losing the option for discounts and promotions. You lose the ability to lower prices if you need to sell extra inventory or want to use discounts as a marketing strategy.
Compared to fixed pricing, dynamic pricing offers a lot more flexibility in pursuit of revenue and profitability goals.
Advantages and Disadvantages of Dynamic Pricing
Compared to fixed pricing, dynamic pricing offers a lot more flexibility in pursuit of revenue and profitability goals. Let’s look at some of the key advantages of dynamic pricing:
- Boosting sales when demand drops. If there is a degree of seasonality in what you sell, being able to lower your prices for that time can entice customers to buy from you.
- Maximizing profits. If you have a product flying off the shelves, you can raise prices to increase profits.
- Outmaneuvering competitors. If competitors are changing their prices, you can quickly adapt and offer a more competitive price. For example, if a key competitor is charging $10 for an item you normally charge $7 for, you can quickly come in at $8.50. This gives the impression of cost savings for the consumer and increases your profit margin on the item all at the same time.
- Responding to changing market conditions. Dynamic pricing allows you to set optimal prices in response to natural price fluctuations in the market. Individual product demand and supply change constantly, and being able to move with the market while remaining profitable is key.
There are a few things to watch out for, however, when it comes to dynamic pricing.
- Suffering from negative consumer perceptions. In most cases, consumers won’t notice subtle changes in price. However, drastic price swings in volatile markets can lead to some customers paying more for the same product than others. This can alienate some customers.
- Crossing the line into price discrimination. Showing two different customers different prices based on demographics, purchase history, location, etc. can cross the line into price discrimination. While this is not necessarily illegal, certain forms of price discrimination can lead to antitrust violations. Dynamic pricing based on market conditions and not individual characteristics of shoppers is the best way to avoid this.
- Getting into price wars. Trying to outdo your competitors in a dynamic pricing environment can lead to price wars, which can end up being a race to the bottom. Dynamic pricing can show you where to compete and how much you should be willing to lower your prices without sacrificing profitability.
The Importance of Price Intelligence for Dynamic Pricing
Dynamic pricing is a powerful strategy and one that most modern brands and retailers should use. But it’s not possible to do so without price intelligence. This is what will give you all of the context you need to make pricing decisions in real-time and quickly update your prices across all of your channels.
Dynamic pricing has existed in some form for a long time. Bars holding happy hours, airlines changing ticket prices daily, and other forms of dynamic pricing have formed the basis of many pricing strategies. But dynamic pricing at scale in the retail space has only become possible over the last decade or so, as the ability of retailers to collect, store, and analyze massive quantities of real-time pricing data allowed them to adopt dynamic pricing models.
There are many use cases of price intelligence software, and all of them are essential for a strong dynamic pricing strategy in 2020 and beyond. It’s impossible to price your products effectively without being able to map your pricing to what the competitive landscape is doing. Understanding your competitors’ SKUs is just as important as knowing your own.
Price intelligence software not only gives you the ability to see where your competitors are pricing similar products, but how the pricing strategy of your market reflects wider economic realities. Accurate, timely price intelligence is what gives you a competitive advantage in knowing where the market is moving, allowing you to test pricing at scale and be more agile.
There are many ways to use price intelligence software, but the most important thing to keep in mind is that it is a tool that must be used in pursuit of your business goals. You get the most out of it when you have a firm grasp of your revenue, profitability, and market share goals. The adjustments you make on a weekly, daily, or even hourly basis are just a means to reach those goals.
Editor’s Note: This post was originally written and published in July 2014 by Arie Shpanya and has since been updated and refreshed for readability and accuracy.