Table of Contents
I. What is Dynamic Pricing?
Dynamic pricing is a pricing strategy where the price of a product or service keeps changing depending on a lot of factors. Hotels and airlines are very common examples. Nowadays a lot of companies have adopted this tool to maximize their profit through eCommerce.
II. The Role Dynamic Pricing plays in your Marketing Strategy
Dynamic pricing modifies the simple marketing strategy of “demand and supply” to demand, supply and price change.
How can we change the price of a product as per demand and supply? We need woolen clothes in winter, light fabrics in summers. Rain calls for umbrellas and gumboots. At Christmas, Christmas trees and Santa caps are in demand. If you are selling any of these items, you know how important it is to have the stock ready to supply when the demand hits the roof.
How about a little change in price to increase your profit margins? The person who wants to buy an umbrella when the rains have already arrived will be willing to pay a bit extra for their need.
Why not give a discount to your regular customers and make them happy to buy from you at regular and not ‘season-inflated’ costs?
A lot of brick and mortar businesses have used these strategies for many years.
With the manifold increase in customer base due to ecommerce, the same strategy now applies to a lot of online customers. This strategy is good to retain old customers by offering them a discount on the items they like and to make a profit from one time visitors.
Once peak sales time is over and you have stock left, announce a stock clearance sale. eCommerce stores do this multiple times each day.
Amazon is a classic example. On Amazon, the prices of the products change every 10 mins on an average. If we look at their profits, this pricing technique sure works well for them!
III. Why should I go Dynamic?
Dynamic pricing is based on algorithms where a lot of factors like time, season, market, competition, etc. are considered.
These factors together make a big difference in the revenue of any business. Dynamic pricing is known to be a very effective profit-boosting tool.
With this strategy, your profits will increase considerably during the peak time for your business and some sales will still be on even when the peak time is over.
A small increase of 0.5% in prices will boost your profits by 5% if your profit margin is 10%. Think about it.
IV. 4 Common Dynamic Pricing Strategies
Dynamic Pricing has taken eCommerce by storm. With the growth of online shopping, dynamic pricing has seeped into retail businesses too. Earlier it was practiced majorly by airlines and hotels.
1. Stay Competitive
Dynamic pricing gives you an extra edge in the competition. Have you ever wondered why have you been shopping from a particular website while there are others available for buying the same products?
Every online customer compares prices from other websites before finalizing his purchase. Customers’ browsing history contributes to the dynamic pricing of the products they liked but didn’t buy.
Chances of those customers to make the purchase are higher if they are offered good pricing on similar items. Not to forget that your competitors know about dynamic pricing as well.
So you have to keep updating your pricing ahead of your competition. If your pricing and offers are attractive as compared to others in the market all the time, you have won the game!
Time is another very important factor to determine the price of a product. This strategy is very successful with companies where a customer is ready to pay more for the time and date of his choice.
This dynamic pricing strategy has been followed by airlines but, it is creeping into other sectors as well. Time-based dynamic pricing has been adopted very effectively by hotels, theaters, theme parks too.
Disneyland is a very good example of time-based on dynamic pricing. They brought a turning point in the sector of theme parks with the introduction of fast passes to cut the wait time. By paying a bit extra, visitors can make their ride reservations in advance with a reduced wait time. This amazing ride reservation system enables guests to cover more attractions.
3. Season Dependent
Season dependent dynamic pricing is very common with hospitality, entertainment, and tourism industry where the prices fluctuate based on holidays or events.
Hotels charge higher prices in the holiday season or during a big event in the city. They then decrease prices during the off season to increase occupancy. Other products, which are season dependent too follow the same strategy.
That is why the rates of air conditioners, heaters, water coolers, umbrellas, raincoats, etc. are fluctuated according to the season in which they are used by the consumers. During those key periods or seasons, you can increase the prices of your products and boost your profits.
4. Peak User Pricing
The products or services which are used the most at a particular time bring in more cash flow during those peak hours. How about increasing the price of the product during those peak hours and increasing your revenue.
A classic example is Uber surge pricing. On occasions like Friday nights and New Year’s Eve, Uber increases its fares. The customers are informed about the increase in prices and the ride to them is available only if they agree to pay that price. Uber works on a simple multiplier that works according to the demand for cabs and available drivers.
Surge pricing enables drivers to make more money too so, it is profitable for the drivers to change their locations and provide service in areas with fewer cabs during rush hours.
This strategy, along with factors like good infrastructure, systematic back end, and attractive marketing enhances profits for companies where peak user pricing can be applied.
V. The right software is the game-changer
Dynamic pricing tracks every customer. You should consider purchase trends, favorite items, peak time, etc. before you implement dynamic pricing for your products. Can you imagine the time and energy you need to do all this manually?
Hence, the need for the right software for the successful implementation of dynamic pricing. The best price optimization software may cost you a lot of money but, it is a business investment that will bring that money back to your account with some additional profit.
Dynamic pricing involves lots of technology and algorithms. A good software leaves no chances of error and at the same time leaves you with full control over the process of price fluctuation.
VI. The Advantages of Dynamic Pricing
In the current eCommerce scenario, dynamic pricing is the best pricing strategy to adopt. After citing so many examples of its success, let’s discuss the advantages.
1. Boosts Sales
Dynamic pricing boosts your business sales very effectively. While you charge more during the period with more demand and increase your profits, lowering charges helps you meet your revenue targets during the slow sales period. On average, the strategy of dynamic pricing increases your revenues and makes your eCommerce business profitable.
2. Create a higher level of demand
Lower prices during off-season create more demand than usual. Combined with sales and offers, it can attract more customers to your products.
You can use this price fluctuation to attract more customers to products which do not sell. This way you can create a higher demand for your products even during a slow period.
3. Allows for pricing to reflect demand
Increased prices of any product are based on the assumption that some consumers are always ready to pay extra for their needs. Off-season fruits and vegetables in the market are always highly-priced.
The export of such commodities, transportation and storage together increase their cost. The availability of such goods at a higher cost in the market reflects the demand for these items irrespective of the price.
There is always a section of consumers who would not mind paying extra for what they want.
VII. The Disadvantages of Dynamic Pricing
Nothing is perfect. Dynamic pricing gives you an edge over your competitors but it has some disadvantages too which you should take into account before you implement it.
1. Can lead to a price war
Dynamic pricing can lead to a price war between businesses which, in turn, can incur losses to one of them. Continuous lowering of prices due to competition causes financial harm to the business. This is where automated software helps you as it collects data and doesn’t allow you to lower prices beyond a point.
2. Smart shoppers have figured it out
Shoppers can’t be fooled easily and repeatedly. Smart shoppers figure this strategy and compare prices before they shop. Sometimes they discover that the same product was bought by someone else at a lesser price. It is not a good experience for a business owner to issue refunds to their customers for the price difference.
3. You risk customer alienation
Customers who find out about your dynamic pricing strategies can shift to other sites and you sometimes lose loyal customers. Sometimes these customers don’t come back at all.
There is no business growth without experimenting and taking risks. Dynamic pricing gives you a lot of opportunities to experiment with the product’s selling price.
It is a tool that cannot be ignored in present times where everyone from airlines to retail eCommerce stores is going dynamic with their pricing. With the rising competition in the eCommerce market, it is difficult to stay rigid in your business strategy. So go dynamic and earn more!!