Revenue Management: Definition and Dynamic Pricing

In the world of ecommerce, you’re bound to come across terms that might initially be unfamiliar to you. You could potentially misunderstand or even misuse these terms. Doing so can be detrimental to the running of your business. So in this post, we’re going to look at two advanced ecommerce terms, dynamic pricing & revenue management, and understand what they are.

You’ll learn

1. What is revenue management
2. What is dynamic pricing?
3. How they differ
4. How can you use them within your own ecommerce store?
5. An example

What is revenue management

The main aim of revenue management is to maximize the number of profits you’re able to earn through market demand forecasting.

Revenue management takes a qualitative approach to price and inventory. Initially, this concept was aligned with the airline industry, but since then it’s been adopted by other ecommerce store owners.

Revenue management uses analytics in order to predict where and when there will be demand. By analyzing past purchases and consumer behavior, retailers are able to optimize their entire customer experience process – including price.

Revenue management strategies work best for products that are receptive to price changes.

If you only sell your products at certain times of the year, you should think about adopting a revenue management process within your store.

But in order for revenue management to be successful, you need to, as an ecommerce owner, understand who your ideal customers are, how they think, and what value a product holds for them.

What is dynamic pricing?

Dynamic pricing is a process where you focus on price and adjust accordingly based on price levels.

Dynamic pricing uses intelligent algorithms to calculate and adjust prices in real time. In this way, you’re able to recalculate and optimize your prices as often as you need to in order to maximize your revenue and increase your profit margins.

Dynamic pricing doesn’t just take into account pricing, it also considers your competitor’s prices, your cancellation rates and more.

How the terms differ

There are many similarities between dynamic pricing and revenue management. In fact, dynamic pricing actually falls under the umbrella terms of revenue management.

That doesn’t mean, however, that you can freely use the two terms interchangeably.

First of all, both concepts take the idea or premise that you can sell the same product at different prices depending on a number of pre-set ideas or rules.

Both concepts heavily rely on data and technology in order to make the most accurate predictions as to what the right price should be.

However, you should not confuse these terms with an overall discount strategy. This is because dynamic pricing and revenue management can actually increase prices – especially when there is higher demand.

Using these strategies within your ecommerce store

Choosing what sort of pricing strategy to adopt within your ecommerce store falls down to a number of things:

1. What products do you sell
2. What your business goals are

Although both strategies help you find the right customer to sell the right product at the right time, they need to be implemented with caution.

In an ideal world, when it comes to revenue management, you’ll be looking to optimize the volume of sales. This can include reducing your prices to stimulate times of low demand, or increasing your prices to exploit moments of high demand.

So when it comes to revenue management, you can opt for a static or dynamic approach.

The static approach looks closely at generating different price points based on price-performance levels.

Dynamic pricing, on the other hand, looks at a range of prices over time to come up with ongoing tactical price adjustments to suit your business at any current point.

An example

Let’s say you sold long-distance running shoes.

This is the sort of product people are happy to buy throughout the year. However, there will be certain situations where you might find you have an opportunity to increase your prices.

Each year, thousands of people take part in marathons and other long-distance running events.

Imagine if you were able to adjust your prices (by location) based on how close the next big marathon was?

You’d find your sales and profits would increase as people are happy to pay more (demand) for a product they need.

If you compare that to selling paper, for example. It’s much harder to predict when someone will need new paper.

In this instance, it might not be a good use of your resources to adopt revenue management for this sort of product simply because you might find that the data doesn’t support any useful insights to help you move your business forward.

Final thoughts

By now, you should have a clear idea of what the terms, revenue management, and dynamic pricing mean.

You should also understand how you can apply these concepts within your own ecommerce store and the benefits of doing so.

Have you ever implemented these strategies in your store? Leave a comment below.