Dynamic pricing is a type of price discrimination that will dominate nearly all industries in the near future. The pioneers of this strategy in the e-commerce industry invested heavily in dynamic pricing engines and gained a significant competitive advantage. Now, SMBs can benefit from dynamic pricing with the help of its software service and with its help, compete with giants.
What is dynamic pricing
Put simply, dynamic pricing is a process where you change the prices of your products in accordance with market trends and conditions.
For instance, you might decide to charge a higher price during a time of increasing demand. Conversely, you might choose to lower your prices during low-demand periods.
This allows you to create a flexible pricing strategy based on factors you may or may not be able to influence.
In most cases, dynamic price alterations happen automatically using intelligent software that bases pricing decisions on real data and algorithms to put together the perfect price point.
Factors that could influence your dynamic pricing strategy include:
- Location: where your customer is located when they receive the product
- Time: what time of day a customer is looking at your product
- Day of the week: For some businesses, varying prices based on the day is a viable route.
- Demand: When products are in high demand, it makes sense to increase the price to reflect this.
- Your competitors: When your competitors drop their prices, you could consider lowering yours as to not outprice yourself from the market.
Examples of dynamic pricing (+industries where it works well)
Dynamic pricing is most commonly seen in industries where people come to expect price discrepancies.
Think about when you buy flights, book hotel rooms or purchase tickets for concerts.
Flights rarely have a fixed price and you know as well as anyone that booking your flight closer to the departure date will result in an increased price compared to if you booked it 6 months in advance.
When booking hotel rooms, hotel’s pricing algorithms take into account how many other people will also be looking to book during that same period.
If you’re booking a hotel near an event, you might notice the price increases compared to if you booked that same hotel when there was no event on.
This is because the hotel understands that many people will be likely to seek a hotel in the area during the same time period so they’re able to raise prices to meet that demand- knowing people will pay.
But what about retail? Can you effectively use a dynamic pricing strategy for your e-commerce store without alienating your customers?
Yes, definitely. You just need the right processes in place.
Dynamic pricing: the Amazon way
When it comes to e-commerce dynamic pricing, Amazon leads by example. When you’ve purchased from Amazon in the past, you might have noticed that upon second look, the price you paid is slightly different from the current listing price.
This is normal. In fact, it’s been known that Amazon changes prices every ten minutes on average.
If we look at these Bose headphones, they currently cost £289.00 but this hasn’t always been the case.
So if you were looking to buy at this price you’d know you were getting a good deal.
- Total control over price positioning.
- Autonomous methods of staying ahead of trends and reacting to changes in the market conditions.
- Flexibility around revenue and profits.
- Audience segmentation based on different levels of willingness to pay, targeting each segment at different price levels.
Research by Forrester suggests that using price optimization software to keep track of your competitors and trends can improve your gross margins by up to 10%. What’s more, using dynamic pricing has seen profit boosts of 25%.
- It can lead to customer alienation if customers detect it. Make sure your personalized offers will reach customers through personalized channels.
This strategy will dominate nearly all industries in the near future. We recommend investing in this technology as soon as possible. Luckily, dynamic pricing software minimizes the costs for SMBs, leveling the playfield in the e-commerce industry.