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Dynamic Pricing: How Does It Work, Pros & Cons, and the Amazon Way

Dynamic Pricing: How Does It Work, Pros & Cons, and the Amazon Way

June 5, 2018


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 this strategy with the help of software services and compete with giants.

What is dynamic pricing

Put simply, it is a strategy where you set flexible prices based on changing 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, 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 are:

  • 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)

It 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.

Flight Tickets Dynamic Pricing

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 this 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 this strategy, Amazon leads by example. When you 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.

Bose Headphones Price

If we look at these Bose headphones, they currently cost £289.00 but this hasn’t always been the case.

Bose Price Changes

So if you were looking to buy at this price you’d know you were getting a good deal.

Benefits

  • 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.

Disadvantages

It can lead to customer alienation if customers detect it. Make sure your personalized offers will reach customers through personalized channels.

Parting words

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.


Frequently Asked Questions

What is an example of dynamic pricing?

The airplane tickets are dynamically priced based on changing demand and supply.

Is dynamic pricing legal?

Yes, dynamic pricing is legal.

Why is dynamic pricing important?

In the e-commerce environment where prices change extremely frequently, dynamic pricing is the best strategy to offer competitive prices and gain a competitive edge.



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