Dynamic pricing: what it is, why you should use it it and how to implement it

Simply put, dynamic pricing is a flexible strategy for pricing your products based on a variety of factors, including market demand, price limits, and seasonality.


What is dynamic pricing?

Simply put, dynamic pricing is a flexible strategy for pricing your products based on a variety of factors, including market demand, price limits, and seasonality. A good dynamic pricing strategy allows you to adjust prices quickly and on a large scale while understanding the impact of your changes.

Perhaps this definition seems like an easy way to start a discussion about the relevance of dynamic pricing to your online commerce. Take a closer look. Keep this definition in mind. Like dynamic pricing itself, the definition is more complicated than it might first appear.

The impact of dynamic pricing on profitability

A dynamic pricing strategy is not new. The basic idea of adjusting price to demand is as old as pricing itself. In fact, pricing used to be based on haggling. A fixed price seemed "fairer" and was certainly less time-consuming for the retailer. Customers have become accustomed to this and now expect fixed prices, especially in retail. But that's changing right now.

Using a dynamic pricing algorithm allows retailers to get the most revenue from their products.

As Retail Prophet puts it, "It allows a retailer to optimize their pricing based on real-time inputs, as opposed to long-term pricing where they either price too low and give up margin unnecessarily or charge too much and lose sales."

It also ensures that the customers who value a product the most have the opportunity to buy it. Level your online playing field. Gain a competitive advantage with price intelligence, automatic price adjustment and robust market intelligence.

Why do other pricing strategies often fall short?

If you refuse to be dynamic, you are left with two basic pricing strategies. You can set a static price based on your variable costs or a price that meets your desired profit margin.

These pricing strategies assume that you will achieve the sales volume necessary to cover your fixed costs for your desired profit margin. You will find that more brand owners prefer a fixed price strategy over a dynamic strategy. However, most retailers prefer fluctuating prices because it gives them more control over sales volume.

Fluctuating prices are basically what dynamic pricing used to be. You compile market data, process the data, and then adjust prices as needed. This process can take weeks, especially if it's done manually. On the spot, your customers are charged the same price while you gather and analyze data. Prices are still dynamic, but they are slow and tend not to respond in a rapidly changing market.

Either way, you're talking about fixed prices. Remember JCPenny's "Everyday Low Pricing?" It's been shown to work well (hint: not well).

According to iProspect's Scott Randel, "With fixed prices, companies either miss out on profits or potential sales, depending on how many customers are in the market."

In other words, these pricing strategies can fail because your customers are more dynamic than you are. They're looking around. They're looking for better prices, better products, and better choices. If you don't respond to them, you'll lose them to the competition that does.

When does dynamic pricing not work?

There are two major challenges when it comes to implementing dynamic pricing effectively.

Dynamic pricing is not the same as price discrimination: selling the same product to two different buyers at different prices. An honest and trustworthy approach to dynamic pricing can avoid price discrimination, according to the Harvard Business Review.

After all, the goal of dynamic pricing is not to damage your customer relationships. Your goal is to be more responsive to your customers on a more individual basis.

How an effective Dynamic Pricing strategy works

This solution is dynamic pricing powered by machine learning. For example, 35up's dynamic pricing platform uses competitor pricing intelligence to recommend new prices and automatically recalculate them.

Some data points considered are inventory levels, consumer demand and seasonality. The more SKUs that are re-priced in this way, the better the algorithm becomes at pricing your products. Data is continuously collected to refine pricing in a way that best serves your business and your customers.

An effective dynamic pricing strategy leverages competitive pricing information and automates the process. The platform knows the important variables, has all the market data you need, and reprices your SKUs.

How to implement dynamic pricing

We have defined dynamic pricing. We have explained how it is useful or not useful depending on the use case. So how can you implement a strategy? We recommend a simple framework to get started:

  1. Choose your SKUs
    First, decide which SKUs you want to dynamically reprice. Obviously, some of your products will be better suited for this pricing strategy. This could be an entire category, a specific product type, your entire assortment, or another segment.
  2. Specifying the price adjustment rule(s)
    Next, select which repricing rules you want for these SKUs. There are many possible options available to you, so this is a great opportunity to test strategies or refine your approach for improved results.
  3. Configure price limits
    Next, set price limits for your selected SKUs. This is a very important step. With dynamic pricing, the algorithm could set a new price that is lower or higher than your brand - or your margins - are comfortable with. Price barriers prevent this from happening. They are simply a minimum price and a maximum price for your rules.
  4. Set up a schedule
    Finally, you can set up a schedule for your price changes. You may want to implement dynamic pricing only during a specific season or shopping event. Or you may want to test pricing for a specific period of time and then review the results. Set the schedule, launch the strategy, and you're ready to go!

All in all, if you're going to implement dynamic pricing yourself, make sure you have good pricing data to inform your decisions. Don't run dynamic pricing based on assumptions.

Klaus Wegener