Defining a pricing strategy and building a financial plan for your ecommerce business are both key to establishing your brand. Dynamic pricing is one of the most flexible and adaptable pricing strategies, and it can help you increase profitability and market share.
In this article, we will learn what dynamic pricing in ecommerce is, how to implement a dynamic pricing strategy, and how the largest ecommerce companies make use of it to dominate the market.
What is dynamic pricing?
Dynamic pricing is a highly flexible pricing strategy also known as surge pricing or demand pricing. It defines prices based on a range of forming factors, both internal and external. This type of pricing strategy allows business owners to set different prices to match the current demand level and maximize revenue.
How dynamic pricing works
Dynamic pricing in ecommerce works in a way that encompasses the features of the main pricing strategies to remain competitive and maximize adaptivity to the constantly-changing market demand.
As opposed to fixed pricing, the dynamic approach is focused on the current state of the market rather than the product value, which can remain constant.
Dynamic pricing means the prices you present to your customers at a given point in time have been developed taking many factors into account and are relevant to each selling circumstance.
Despite the common belief that dynamic pricing in ecommerce equals pricing discrimination, it does not mean selling the same item to different customers for different prices.
The purpose of this pricing strategy is not to damage your customer relationships, but approach your customers more individually.
When to use a dynamic pricing strategy
As any other pricing strategy, dynamic pricing model needs to be applied wisely. This pricing strategy helps maximize profit on every transaction as you determine what price customers are willing to pay.
Here are three common scenarios where you can take advantage of dynamic pricing in ecommerce.
- Testing new products or offerings. When launching a new product, it might not be easy to understand how it should be priced. Taking many factors into consideration, including competitors' prices, current stock, and demand levels, you can lower pricing for faster market penetration to quickly gain market acceptance.
- Simplifying inventory management and creating demand. Raising prices on popular products and lowering them on slow-selling items can greatly influence buyer behavior and clear inventory.
- Keeping up with the competition. Making sure you know the current state of the market and your competitors' prices means your products are not under or overpriced.
Dynamic pricing examples
Dynamic pricing is commonly found in a number of industries, including ecommerce, tourism, transport, and events.
One dynamic pricing example is time-based pricing, which dominates the tourism industry. Prices are raised during the peak season or special events to maximize profit, and lowered in the off-season.
We can see the same in the transportation and event industries. For example, airlines may change prices based on the day of the week, departure time, the number of seats a flight has, and so on.
Ecommerce is one of the industries that quickly adopted the dynamic pricing strategy. Dynamic pricing and ecommerce evolved together with the rise of online shopping, and more and more marketplaces began implementing it to maximize profit.
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Let's take a look at how ecommerce giants take advantage of changing prices.
As a leader in ecommerce, Amazon has been utilizing the dynamic pricing strategy for over a decade, and experts say that its implementation is one of the reasons why the marketplace has become what we know it as today.
According to different studies, Amazon may alter prices by up to 20% during promotions or as a result of competitor’s pricing changes. One of the reasons why this strategy is successful is that customers know that prices vary, and they try to make their purchases at optimal times.
If we want to understand how dynamic pricing in ecommerce works, let’s look at the strategies used by major marketplaces. Amazon and other well-known marketplaces like Etsy and Google Marketplace use three major factors that affect price changes.
- Demand and stock volumes. Amazon makes price changes based on current and anticipated demand as well as the product stock volumes. Prices are also determined by what drives customers to make purchases, such as seasonality.
- Frequency of product visits. All major marketplaces utilize cookie files to track user activity and product page views, as well as whether buyers tend to browse related items.
- Purchase date and time. By analyzing when certain items have been purchased before, and the current live data, the marketplace employs price changes depending on the time and date of the purchase.
How to implement the dynamic pricing model
The process of finding the right pricing strategy and its implementation is not easy and there is no universal approach that fits all. Here are the five steps to implement the dynamic pricing strategy that can help you identify your business objectives and how the new pricing model can be used to meet them. The process is based on the concept of breaking goals into actionable steps.
Step 1: Define your business objectives
The first prerequisite to successful implementation of the dynamic pricing model is evaluating your business mission and objectives, the current market position, and understanding what your ecommerce growth strategy is. The key is to understand how the dynamic pricing strategy aligns with your business objectives.
Step 2: Build your pricing strategy
A great pricing strategy uses your business objectives to make smarter pricing decisions. Think of how dynamic pricing can help you achieve your long-term goals. There are a few types of dynamic pricing you can use to meet specific objectives.
For example, the high-runner strategy is commonly used by major marketplaces like Amazon. With this strategy, you are setting lower prices on the most popular and high-demand products to draw attention to your online store and win the competition. This strategy is great for building customer loyalty and confidence, so your buyers are less likely to look for similar products elsewhere. At the same time, you price less popular products higher than your competitors to capture profits.
Step 3: Choose pricing methods
Now we need to choose which pricing methods can be used for your chosen pricing strategy. Although there are quite a few pricing methods defined, the main ones forming all others include:
- Competitor-based pricing. Following the competitor’s prices and using them as a reference point.
- Cost-plus pricing. Calculating the cost price and adding the desired margin to form the item’s price.
- Value-based pricing. Basing the price on the customer’s perception of the product’s value.
It’s important to note that the pricing methods can be combined to support your pricing strategy.
Step 4: Establish pricing rules
This step requires you to create more specific pricing rules that will be applied to the chosen products or product categories. These rules should be simplified and ready-to-implement, which means there is no room for abstraction here.
Step 5: Test and evaluate your pricing strategy
Even the most thought-through strategies need to be evaluated and improved based on the results they yield. Make sure you have a sales monitoring system in place to see if the new strategy applied is actually accomplishing the desired goals. Strategy reevaluation is one of the most important and sometimes unavoidable processes. Making changes to the strategy based on the results it shows means it is implemented successfully and allows you to monitor it more effectively.
Artificial intelligence in the implementation of dynamic pricing
Recent studies have shown that artificial intelligence may be a total game changer for dynamic pricing in ecommerce. It is a known fact that all major marketplaces like Amazon have AI-based technology in place to make dynamic pricing strategy implementation highly automated.
Pricing heavily depends on the monitoring of the market and supply and demand levels. AI can greatly improve a company’s existing processes and data flows when it comes to pricing. The concept of AI-powered dynamic pricing means prices are automatically adjusted based on current and historical supply and demand, as well as competition. As the developed technology and algorithms become more powerful, ecommerce companies’ prices can automatically respond to market factors in real time.
Bottom line: dynamic pricing in ecommerce
Keeping up to date with the latest ecommerce trends and applying the global ecommerce leaders’ experience to power your business is vital to increase profitability and expand your market reach.
Dynamic pricing has been utilized by the major marketplaces for just the right amount of time to say — it's working. Driven by powerful automation, its implementation is straightforward and has proven to show great results when it comes to growing your ecommerce business.
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