According to Wikipedia, Dynamic pricing, also referred to as surge pricing, demand pricing, or time-based pricing is a pricing strategy in which businesses set flexible prices for products or services based on current market demands.
Dynamic pricing is one of the top emerging eCommerce trends being observed in 2020 and is expected to drive eCommerce growth in the 2020s and beyond.
Here’s the short and sweet of the point.
To keep your business up to snuff in the highly-competitive online sales market, you should think about adopting dynamic pricing technology and strategies.
Now, that sounds complicated, but it isn’t! eCommerce companies must track their competitors’ prices regularly, analyze seasonal and historical product demand, and react to these pieces of data.
You may be wondering why you haven’t been doing that – well, you may have without knowing it, as the definition above is just complicated textbook wording!
Types of dynamic Pricing Strategies
Generally, you can expect to see four basic dynamic pricing strategies, variations of which are used in the industry. Apart from the four basic pricing strategies — premium, skimming, economy or value and penetration — there can be several other variations on these.
How to implement dynamic pricing
According to Omniaretail, there are 5 core steps for implementing Dynamic Pricing which are listed below:
- Define your commercial objective
- Build a pricing strategy
- Choose your pricing method
- Establish pricing rules
- Implement, test, and evaluate the strategy
Research of the Competition
Make sure you are researching competitive products or services, and keep on top of new developments and announcements from your competitors, but you should be doing that every day anyway!
Set yourself up for success by setting up a Google alert to notify you when any new information about a competitor (e.g. price) comes up online – the best thing is that Google will automatically rank your results, the most important facts showing up first!
Can you answer these questions for yourself?
- Who are the company’s competitors?
- What advantages do the competitors possess? What gives your company a competitive advantage?
- Compared to these other companies, how do you compete? What’s the secret weapon you have?
- What are the barriers to entry in your market?
Conducting thorough market research on your customers or potential clientele is an important part of crafting a business plan or keeping your products and services competitively priced. This is where you also define your company’s commercial objective.
To find the information you need, you need to conduct surveys, fund test groups, collect information through customer emails and texts, or purchase already-collected research on your market segment.
Market research helps you to understand your customers. What are their needs, preferences and behaviors? Why would they buy your products or into your services? – Put some research into your competitors.
Why would a consumer buy their products or services over yours? Gather as much demographic information as possible, it is easier to hit a target that you can see.
The only true way to stand out in this worldwide market is to sell a unique product or service. The internet has had a significant impact on the competitive landscape.
It allows you to convey unique value to potential customers without ever sitting in front of them. While this is an advantage, it can also be a disadvantage – you have no way to intervene if they change their mind!
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But what can we learn from the big B2B companies on how to implement dynamic pricing?
According to McKinsey & Company, “Developing a dynamic-pricing capability needs as much emphasis on people and processes as it does on analytics and technology” (see illustration below).
Dynamic pricing advantages and disadvantages
- Your Pricing Strategy Becomes Easier to Control
A common argument against dynamic pricing is that it reduces your control over product pricing. In reality, it has a completely opposite effect.
As a retailer using dynamic pricing, you’ll have access to real-time price trends across thousands of products in your industry.
You’ll be able to see the pricing changes of your competitors, and will have a clear idea of the supply and demand of individual products. This will help you set the right prices for different products and maximize your revenues.
- Your Brand’s Value Stays in Place While Pricing Changes with the Market
Many eCommerce sites are terrified of the idea of using dynamic pricing, afraid that it could appear they are manipulating prices to drain their customers of every possible dime. That isn’t quite true!
Brands can actually protect, and even strengthen, their brand value by implementing dynamic pricing. Retailers can set a price floor that reflects their brand value and allows them the flexibility to stay profitable.
So, eCommerce retailers can establish themselves and advantage over even the biggest brick and mortar stores. Now that’s a win!
- Your Business Saves Money in the Long Run
Dynamic pricing is based on the changes in real-time product supply and demand.
It takes into account the price fluctuations in the market, monitors competitor activity and individual product demand and supply.
As a result, it gives eCommerce retailers the right data and information that can be used to set optimal product prices and stay profitable despite the price fluctuations.
This saves retailers money in the long run. Since all the calculations are done by web-based software and applications, there’s no need for spending money in manual calculations and administrative activities.
The reduction in these overheads also adds to your profitability in the long run.
Dynamic pricing examples
Dynamic pricing is a blanket term for any shopping experience where the price of an item fluctuates based on current market conditions. On Amazon, as well as multiple other marketplaces, e-commerce stores, and sales-related businesses, dynamic pricing is utilized by retailers to optimize product prices.
Some other examples are price setting for Uber taxis – where the company advertises the price will vary depending on demand. … Major league baseball clubs have used dynamic pricing to set prices for seats. Demand varies depending on form, quality of opposition and other factors. For popular games, prices will rise
Dynamic Pricing Model
The big question is – is dynamic pricing a fair model?
Well, yes, in most terms. We experience dynamic pricing every day – we go to the store and see items at “full” price that we aren’t willing to pay, so we go to another store, search online, or wait for a sale.
That is essentially dynamic pricing – businesses can set prices higher or lower than the base cost for their goods, no problem.
The problem comes when large corporations begin setting up predatory pricing models, such as the known occasion when they spike the price of bottled water in hurricane zones, for example, looking to grab up a quick buck, however, the government is wise to this and put laws in place to attempt and curb it.
Believe it or not, the best way to visualize dynamic pricing is to think of produce! No, not pumping items out of a factory, but the green stuff in the supermarket!
Dynamic pricing works well when an inventory is perishable – that’s the definition of fresh produce – and also where there is a clear capacity constraint, aka, the amount of aisle space in the supermarket.
You know as consumers browse, they don’t want rotten apples or brown broccoli. Therefore, your stock will only last so long before you must change it out with fresher produce.
Have you ever been into the fresh section and seen certain items with reduced prices or “buy one, get one” deals? That’s dynamic pricing in action – the store has reduced prices on those items in order to sell them quickly, as not to make a loss.
The fresh products a few feet away will still be of the same price, even though they’re technically still the same item.
The store realizes that with a reduced price, even with older produce, the customer will still be happy, as they understand it must be used quickly and get a brief rush from getting “a deal.”
This is one of our series on emerging eCommerce trends where we are discussing the top 9 eCommerce trends in 2020 and beyond.
What are your thoughts and experiences with these emerging eCommerce trends? Use the comments below to share.