Dynamic Pricing Strategy: How To Increase Profit Margins

Your company depends on your dynamic pricing strategy. Even the best product in the world won’t be able to survive bad and static pricing. Pricing too high means that no one will buy it, and pricing too low means that you will lose money.

Pricing impacts your business by affecting your customers’ purchasing decisions and dictating how much you’ll earn. In addition, for many people, pricing is the main factor in purchasing decisions, and no amount of great marketing can make up for bad pricing.

You need to find a spot where your product is affordable, and you still have money to make it.

What is dynamic pricing strategy?

Dynamic pricing strategy is the process of setting prices and changing them over time based on several factors, trends, and predictions. These factors are:

• Standards in the industry – average pricing 
• Conditions in the market – supply and demand
• Expectations from consumers – how much they want to pay

So, dynamic pricing means combining all of these factors and coming up with a price that satisfies them all. And subtlety is the key here.

How does dynamic pricing work?

You can see dynamic pricing everywhere. For instance, sweets used to cost a lot less when you were a kid. Now they are more expensive because of inflation. When you visit a stadium to watch a sports game, you can’t bring food, so people there control the pricing, and food costs more. Gas prices also fluctuate all the time.

It requires you to keep track of a lot of data and collect information about stakeholders in your industry. This is done through analytics software, but you have to understand what you need the most on your own.

This process involves work from both machines and humans. But the process is never the same.

What are the benefits of dynamic pricing?

The main benefit of a dynamic pricing strategy is the fact that you are maximizing profit margins and sales. But, here are some more benefits:

• You’ll always remain competitive with your pricing, thus staying ahead
• It’s easy to optimize your prices 
• It gives you a lot of data to learn from

Mistakes of dynamic pricing to avoid

While there are many benefits to dynamic pricing, there are also many mistakes you could be making. 

Here they are:

• Setting the price and then forgetting all about it, or letting the computer do all the work
• Changing the prices too often
• Undercutting your competition and causing a price war

Starting with dynamic pricing 

The main components of dynamic pricing are software, data, and humans.

Software

Your software needs to be comprehensive, thus intelligent and thorough. It should;

• Collect data easily and quickly as needed.
• Translate data points into something you can understand, and use this information to make predictions in the future.
• Easy to use and appropriate for your budget.

Data

“You need to work based on data that comes from different sources. You need to look at industry averages, consumers, and so on, but also look within your own company. Make specific goals when it comes to margin and revenue, as well as growth, and then also base your pricing on that,” says Timmy Robinson, an event manager at Paperfellows and Oxessays.

People

The automation works, but you also need manpower to be there. You need humans to define what your software will d,o and then they need to take the processed data and make a decision. Of course, they also need to monitor everything to make sure it’s working properly.

What to do and what not to do

By taking the right approach, you can guarantee success for your ecommerce business. So, here are some general rules on implementing a dynamic pricing strategy.

• Consider the standards in your industry, but don’t be a follower in setting your prices
• Be flexible with your dynamic pricing strategies, but don’t compromise on your goals
• Take opportunities, but don’t take advantage of your customers.

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 so as not to outprice yourself in the market.

How to implement dynamic pricing 

Implementing dynamic pricing doesn’t happen overnight. It would create chaos in your company, and it would disturb your team members. It would also be noticeable to your customers, and they might give up on you. 

So, here is how you should implement the dynamic pricing strategy:

Start with initial pricing 

“This is simple and straightforward – you should use what you know to set prices. It’s possible to have some success with this strategy, especially when you are new, but it should be clear that this is not the final destination. Even successful companies with this strategy are not that successful,” says Ellie Biles, an event planner at State Of Writing and UKWritings.

Have a loyalty program

Subtlety is really important so a way to introduce dynamic pricing is to start with a loyalty program which allows you to segment your market to implement different prices for each tier. This is subtle and it will not disturb your customer base too much.

Demand pricing

This is the next level of pricing – the demand pricing where you take all of the previous points and implement them with relevant data about demand into the mix. This uses the prices as balance and then increases or decreases the prices based on demand. The problem with this that it’s not truly flexible. The fluctuations are often just temporary.

Perception pricing

Now, with demand pricing, you have a customer perspective in mind but only on the surface. Now, you are supposed to take your customers further into consideration and ask how much they are willing to pay. This is where it gets granular and you are considering more factors. You are considering value, consumer’s ability to afford the products, willingness to pay more and competition.

Competition pricing

Industry averages are used with the initial pricing strategy, but this is more than that. While this is a tricky one because you don’t want to be more expensive, but you also don’t want to start a price war. So, you need to incorporate this strategy with another strategy to create a nice mix that works.

Holistic pricing

There is not one single real price for anything in the world. The only real price is what someone is willing to pay for it and there is an infinite number of options and factors related to that. From their own preferences to the current state to industry averages and so on. You aren’t expected to know all of this and actually consider it.

Dynamic pricing with its holistic approach means that you accept you never know everything and that you always need to optimize your pricing based on continuous learning and improving.

Conclusion

So, your ultimate goal is to implement dynamic pricing, and successful dynamic pricing examples always come from businesses that are constantly learning more about dynamic pricing strategies, their industry, and customers. Stay focused on your goals.