Pricing can be a major determinant of success for an online business. Setting the right price for your products and services can significantly influence whether people decide to purchase from your store (or not). That’s where dynamic pricing can help. This system can help you stay flexible with your pricing and ensure you’re always meeting your customers’ needs.
What is Dynamic Pricing?
This is a pricing strategy which allows a business to change the prices of their goods and services as necessary. This need is influenced by various factors, allowing a business to be immediately responsive to changes in supply and demand, consumer habits, competitor pricing, or market trends, for example. There are certain things that determine price optimization, including:
- Market demands
- Competitor pricing
- Supply availability
- Sales goals
- Conversion rates
eCommerce businesses are adopting demand-based pricing in droves because it allows around-the-clock price monitoring, which helps them better protect their bottom line.
Why is it Important in eCommerce
Many online merchants already understand how important it is to adopt a reliable dynamic pricing model. And, as they take their time to engage in 24/7 price monitoring, they are rewarded with steadily increasing profits. Here are some of the reasons why dynamic pricing is helpful in eCommerce:
- Increase in profit margins
- Competitive edge over competitors
- Increase in sales
- Improved control over pricing strategies
- Quicker response to fluctuations in demand
- Elimination of manual process of keeping tabs on competitors’ price
- Faster response to supply instability
- Improves online business owners’ insights of market trends
- Helps businesses to properly adapt to a dynamic environment
- Easier optimization of prices on a product-by-product basis
To a large extent, demand-based pricing has a significant impact on your target customers’ purchasing decisions. According to a report by HubSpot, approximately 80 percent of consumers consider price before any other factor when it comes to purchasing any given product or service. That's why you need to consider adopting a flexible pricing strategy.
How does it work?
Before you adopt this strategy to improve your sales and profit margins, it’s important that you understand how it works. Dynamic prices are set by rules-based algorithms that factor in variables like supply, demand, competitor pricing, and customer data. In order to get your strategy to work properly, you’ll need to have the following information:
- An analysis of your company’s profitability
- Automated price management
- Future price trends
- Customer analysis including demographics and behavior patterns
- Market analysis, including competitors
- The ability to adapt to different situations and change
- Actual pricing and availability of products
- Article numbers and product titles
- Product information
- Shipping costs
Third-party platforms will be helpful for gathering some of this information. For example, Easyship can help you calculate shipping costs, including taxes and duties, and get your access to affordable shipping services. If you use platforms like Shopify, BigCommerce or Indiegogo, you can even integrate our app directly with your online store so that you can easily access shipping and product information from one place.
Are There Different Types?
Dynamic pricing isn’t a one-size-fits-all proposition. There are several different types that are best suited to different business needs. You’ll need to think carefully about what stage your business is at and who your target customers are. Below are a few of the most popular models:
- Segmented Pricing: This involves setting a different price for different groups of customers, based on location or demographic information, for example.
- Peak Pricing: This is when a company charges a higher price because they don’t have enough resources to meet demand. This is what Uber surge pricing is.
- Time-Based Pricing: Think about a bar with a happy hour - that’s exactly what this model of pricing is. It’s about offering particular prices for a specified time.
- Penetration Pricing: This is best used for new products or brands. Prices are initially set low to attract customers during the launch, before slowly being raised to market rates.
10 Tips for Implementing a Dynamic Pricing Strategy
For your efforts to yield significant results, you need to understand how to create and implement a good strategy for results-orientated supply and demand-based pricing strategies. Here are 10 tips to help you out:
- Start with initial pricing: This is especially useful for those brands that are new to eCommerce. It entails using the industry’s current pricing standards by putting their profit margins into consideration.
- Combine human intelligence and e-solutions: Though most dynamic prices are determined using e-solutions, human intelligence should also be applied to achieve maximum success with business decisions and avoid any problems.
- Be flexible, but not to the detriment of your business goals: This means that while you should be flexible with your pricing, you shouldn’t set your price at such a low level that it could jeopardize your profit margins.
- Adopt a holistic approach: When using a demand-based pricing model, make sure not to tether yourself to a given price point that you think you should have. Go for the price that your target customers are willing to pay without hurting your profits.
- You shouldn’t always follow the norm: While there are certain industry and competitive standards you’ll need to follow, you should do so with caution. Your costs of goods, business goals, and customer acquisition costs will be different from anyone else's, so set your prices according to what suits your business and customers.
- Implement price differentiation: This entails offering two or more prices to different categories of your customers, based largely on their personas. Offer higher and lower prices based on different versions of a given product.
- Make use of proper value metric: Similar to price differentiation, creating your prices according to appropriate value metrics means you can charge people differently according to different factors. This is easier to apply for software. For example, Easyship’s freemium model means your account price is based on how many shipments you send out - users with less than 500 shipments a month use the program free!
- Offer discounts and couponing: Moderation is key here, and you certainly shouldn’t be offering excessive discounts and unfettered couponing. But, providing a little incentive to certain customers can be helpful in driving more sales.
- Test your prices: It’s important to test out different prices and choose the ones that work best for your customers and business. You don’t want to turn customers away and subsequently hurt your profit margins.
- Be transparent: While many companies now use this pricing strategy to stay flexible, it’s important to be transparent about the fact that you are using it and how it works. Not doing so could be a PR disaster for your brand.
Apart from the above tips, there are also other strategies that you can use to appropriately price your products and maintain a profitable business in the long term.
5 Dynamic Pricing Examples
The implementation of dynamic prices for products and services has become very popular, especially as top brands in different industries have used it to grow their businesses. Here are a few of the most well-known examples:
- Amazon: When it comes to repricing, Amazon doesn’t slack. This is why it changes its prices every 10 minutes, on average.
- Walmart: This major retailer has been using flexible pricing strategies since 2013, and has recorded an increase of more than 30 percent in global online sales. Walmart changes its prices over 50,000 times each month.
- Airbnb: This popular platform for holiday rentals also uses a dynamic pricing model that allows third-party hosts to offer smart pricing to their customers in response to fluctuating demand.
- Uber: This ride-share app is well-known for controlling the price of rides with its surge pricing feature, which activates when there’s a high demand for cars.
- Best Buy: Since adopting dynamic strategies in 2013, this big retailer has recorded an increase in sales of more than 27%. They use this mechanism to entice shoppers to make more online purchases.
- Easyship: Here’s an additional example! We use segmented pricing in our freemium model, while our courier rates are dynamic because they’re always generated uniquely based on a shipment’s particular weight, volume, and other factors.
Win More Sales with Dynamic Pricing
Now that you know the importance of implementing these strategies for your eCommerce business, you should do some research to see if it might work for you. With the information you gather, you should be able to see if your competitors are using it and what prices will work for your customers without hurting your bottom line.