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. How to ‘really’ apply dynamic pricing to your strategy?
6. 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 competitors’ 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 term 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 preset 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 strategies and revenue management can actually increase prices, especially when there is higher demand.

Using revenue management within your ecommerce store

Choosing what sort of pricing strategy to adopt within your ecommerce store boils 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.

On the other hand, if you examine some of the dynamic pricing examples, dynamic pricing looks at a range of prices over time to come up with ongoing tactical price adjustments to suit your business at any current point.

How to ‘really’ apply dynamic pricing to your strategy?

There are dynamic pricing and repricing software in the market that help you to generate recommendations from the data that you’ve collected from competitors. Then, the technology lets you calculate optimal prices through repricing rules that you’ve set based on your competitors’ prices, market demand, and costs.

Once the optimal price rules are set, you can enjoy the rest! The repricing engine works all day, and your prices will be changed according to the fluctuations in the market and,of course, based on the rules that you’ve set. By combining competitive intelligence with repricing capabilities, your business can achieve a seamless competitive advantage in the market. As you’re able to react to every single move in the market, your prices will always stay competitive or optimized.

Let’s give an actual example:

There are two different retailers competing in the same category:

1. The first retailer named “Great E-Commerce Retailer” is selling all types of products from almost every category (electronics, home & kitchen appliances, fashion products, sports products,… the list goes on…)
2. The second retailer named “Super Sports Retailer” specializes in the sports category.

Then, imagine that these retailers are competing harshly over price in the “football shoes vertical”. To take advantage of repricing technology and find the most optimal price, the below rule for Super Sports Retailer can be set;

My prices for every product under ‘football shoes category’ should be 10% lower

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than “Great E-Commerce Retailer”

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but they should be at least 15% higher than my costs.

After setting this rule and assigning it in the repricing engine, “SupeSportsrt Retailer” will always have competitive prices in the football shoe category that won’t veer lower than its costs.

Repricing in ecommerce may become a key advantage for you to remain competitive and grow your business online.

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 that 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 on Revenue Management with Dynamic Pricing

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.