Dynamic Pricing in e-commerce: The Nitty-Gritties of a New-Age Pricing System

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The boom of e-commerce has brought with itself a plethora of trends. And while most have been around or used time and again only to be dismissed, one that has stayed around is the concept of dynamic pricing. 

Customer data and purchase patterns continue to remain an important benchmark for pricing. Dynamic pricing in e-commerce, in particular, makes great use of these data points to ensure profitability for brands. After all, if you price an item exorbitantly, you risk losing a customer. But if you choose to keep prices down, it may cost the business heavily.

If you are one of the many e-commerce brands out there that is wondering how to hit the sweet spot while pricing, consider reading on to discover what is dynamic pricing and how it is used in e-commerce

What is Dynamic Pricing in E-commerce?

To put it simply – dynamic pricing as a strategy entails the continuous tweaking of product prices to align with consumer demands. It is also known as surge pricing or time-based costing, and is a form of price discrimination.

Dynamic pricing relies on current market trends to identify pricing for products and services. It is a standard practice across several industries, including, the transportation, leisure, entertainment, and even hospitality industries. It is often preferred to static pricing,

Lately, the e-commerce retail industry has also warmed up to the concept. The rest of this article will examine how dynamic pricing can positively impact an e-commerce brand, in addition to listing the steps businesses can take to successfully implement the system.

Evolution of Dynamic Pricing

The charming quality of dynamic pricing lies in the fact that it evaluates a customer’s willingness to pay to mark prices up. While statically pricing things is an easier course of action, dynamic pricing allows greater flexibility, and therefore, profitability.

The concept, however novel it may be to retail today, isn’t new. It has existed since the 1980s and was introduced by the airline industry. They used parameters such as destination, season, and departure time, in order to automate ticket pricing. Soon enough, the rest of the tourism industry also followed suit. 

The introduction of the internet in the 1990s sparked a change in how we work and live. Businesses made investments in cutting-edge technologies that would enable them to exchange information and transactions electronically, giving rise to the idea of e-commerce.

With the flattening of the e-commerce market, pricing has become the primary consideration for customers. Previously, retailers had to make roughly 4000 pricing decisions each quarter before the Internet. However, today’s marketplaces experience numerous shifts in prices per day for countless products. And thanks to AI technology, they occur instantaneously.

Why is dynamic pricing important to E-Commerce?

According to a hubspot research, 80% of purchasing decisions are driven by competitive pricing. This is a pretty significant number and a good enough indication of the importance of pricing. 

However, dynamic pricing in e-commerce is responsible for more than that. These include:

  • Customer attraction: Competitive pricing helps to not only bring in clients, but also retain them.
  • Indicating product demand: Dynamic pricing is a reliable indicator of the kind of demand a product has generated. This demand, in turn, becomes a lucrative purchase decision making element for the customer.
  • Bolstering sales growth: Pricing dynamically is often a driver of sales. The influx of “potential customers” is often a gold mine of sales opportunities when nurtured appropriately.

Why has Dynamic Pricing Gained Popularity in Retail?

The last few years, especially the onslaught of the CoVID-19 pandemic, saw the world shift on its axis. While some of that change was alarming, the e-commerce industry found itself on the fairer side of the deal. 

The UNCTAD reported that the number of internet users who made purchases online, went from an already significant 53% in 2019, to 60% between 2020 and 2021. In a separate report, they also noted that e-commerce sales rose from 16% in 2019 to a whopping 19% in 2020.

Digital stores find that dynamic pricing is an invaluable addition to their business structure since it allows them to price their products effectively. This mechanism allows them to adjust prices quickly based on demand, by leveraging high-quality data analysis software.

Moreover, the existence of many shopping apps allows shoppers to compare prices easily. Dynamic pricing allows online retailers to instantly analyze this customer behavior and make changes to their pricing accordingly, helping them stay ahead of their competitors and drive growth.

Top Dynamic Pricing Strategies for E-commerce

There are a plethora of dynamic pricing strategies. They can range from cost-based and time based to bundling and pricing based on groups. Here are some of the commonly used dynamic pricing formats employed across e-commerce websites.

  • Cost-plus Pricing Strategy

This is the most basic e-commerce pricing method used across several organizations. It essentially entails marking the price up for a product or service, or selling something at a higher price than required to produce it.

  • Competitor Pricing Strategy

In addition to studying market and purchasing behavior, businesses also study their competitors. One of the metrics they pay particular attention to is their pricing. Subsequently, firms can use this information to price their products. This is known as competitor pricing in e-commerce.

  • Time-Based Pricing Strategy

This is by far the most commonly used pricing strategy among e-commerce businesses and focuses primarily on determining the pricing based on timing. Some examples of time based pricing include:

  • Implementing surge pricing for same-day delivery
  • Discounting older inventory to move it out of the warehouse
  • Offering pricing reductions on orders placed at a certain time of day
  • Value-Based pricing Strategy

Value-based pricing, also known as price elasticity, is a strategy used by firms to set the price of their goods and services at a level they believe their consumers are willing to pay. Companies determine the customer-perceived value and charge them accordingly, rather than calculating manufacturing costs and adding a traditional markup.

  • Bulk Order Pricing Strategy

Bulk orders are often a very profitable way to move inventory. Therefore, many e-commerce businesses also mark down the overall price of certain products when purchased in larger quantities. This is a great way to cut overhead costs and drive profits.

Steps involved in implementing e-commerce dynamic pricing

E-commerce dynamic pricing isn’t complex, thanks to AI integration tools that substantially simplify the pricing process. If you are wondering how to implement dynamic pricing, there are certain steps that e-commerce businesses need to follow to do that effectively for their product. 

  1. Determine a dynamic pricing strategy specific to your online business needs

To chalk out the strategy that might work best for your e-commerce business, it is absolutely essential to do some research on the metrics that work best within the industry when it comes to dynamic pricing. So, study your competitors closely. 

This part of the process is especially important if the business is keen on implementing more than one variation of the dynamic pricing model in e-commerce. Appropriate data access is the only way to ensure effective execution of your desired strategy.

  1. Implement smart algorithms and AI–pricing tools

The easiest way to implement dynamic pricing is to use the right tools. But the only way these tools can effectively draw up pricing recommendations is if they are up to date and the data fed into them is correct. Moreover, while adjusting pricing, these algorithms study the distinction between price and demand while taking into account many of the following aspects of e-commerce retailing:

  • Procurement Expenses
  • Demand cannibalization
  • Inventory Costs
  • Competitor prices

Hence, while implementing these software, it is crucial to ensure that it is reliable. After all, the accuracy of these models is quite directly proportional to their ability to increase profit margins.

  1. Integrate your price guidance models right

Right after implementing the software, it will show a pricing recommendation. However, these prices can only be implemented automatically or manually – depending on the user’s choice. In case the business is veering towards automation, it will become imperative to integrate the platforms with one another. Otherwise, you might notice that these algorithms and software aren’t making a difference.

  1. Continuous monitoring and updating

Dynamic pricing, unlike static pricing, is an ever-evolving strategy. Remain vigilant of the pricing changes and consider switching out existing strategies from time to time. Evaluate how well your products are performing and keep your eye out for any predefined rules that do not serve your e-commerce business any longer.

Key factors to consider for dynamic pricing for your e-commerce business

There are only two broad categories of factors that have an effect on the way dynamic pricing may fare for a business. These include:

  • Internal factors: Some of these factors may consist of existing data within the organizations, as well as, automations capabilities.
  • External factors: These include consumer expectations, industry standards,  trends, and market conditions.

Nevertheless, it all boils down to the type of business that the brand is involved in. Thereon, it is simply an evaluation of the data at your disposal.

Examples of Dynamic Pricing in E-commerce

Dynamic pricing in e-commerce is anything but new. However, online retailers have familiarized themselves with the concept only with the advent of Amazon and its unique pricing model. 

The online retail giant is one of the most successful examples of dynamic pricing in e-commerce. From electronics and books to apparel and accessories, it offers a wide variety of products. And their use of dynamic pricing is one of the reasons they have grown into one of the biggest corporations in the world.

Brands use all the information they have collected about customer purchasing patterns, competitors, profit margins, and inventory to boost profitability. Dynamic pricing is one of the ways they make use of this data. This can help over time and enable them to take their e-commerce business to newer heights.

Use Cases of Dynamic Pricing in E-commerce

Dynamic pricing has a wide variety of applications. One of its most popular use cases is when retailers sell bulk items at a lower cost. 

Wholesale B2B e-commerce brands generally sell their products in bulk. This allows retailers to make a significant profit when selling it to customers. But did you know e-commerce retailers also borrow from this? Many retailers will sometimes mark down the prices for items bought in bulk. 

One common instance can be seen in online grocery stores and delivery apps where singular items may be sold at its maximum retail price. However, if you buy several of them at once, the prices are often reduced.

Benefits of Dynamic Pricing for E-commerce

If you’ve been wondering about the benefits of dynamic pricing, look no further. Listed below are some of the more underrated reasons why you should consider the pricing model for your e-commerce business.

  • Increased control with dynamic pricing algorithms: While dynamic pricing relies largely on pricing tools, it is ultimately up to a business to customize the pricing parameters. This ensures better control while optimizing profitability.
  • Assists in strengthening your brand: For brands that offer only flat prices, brand strengthening can remain shaky ground. However, brands that employ dynamic pricing can remain flexible and offer lucrative deals during promotions and organize flash sales to strengthen brand positioning.
  • Helps avoid admin costs: If there had to be an answer to the question of “what is one benefit of dynamic pricing,” it is this — there are essentially no admin costs. Not only that, the use of pricing software also ensures better streamlining through automation.
  • Increased sales: Dynamic pricing uses sophisticated algorithms to help define rates. These tools then become the gateway to increased sales with their ability to mark prices up and down based on demand or the requirement to clear inventory.
  • Boosts your profit margins: This one’s simple — More sales equal better profits. And with so much data at your fingertips, you can always trial and error your way through determining what works best for your business.
  • Lets you know your customers better: Not only does dynamic pricing help you price things right, it also offers up market data on a silver platter. Businesses can then use this information to determine demand curve. In addition, it can also allow businesses to personalize shopping for their customers.

Things to avoid while implementing dynamic pricing 

Many online retailers miss out on growth opportunities owing to their ignorance of certain practices that make dynamic pricing the magic potion that it is. Certain best practices ensure that a business evades this fate. Here are some guidelines you can follow to ensure that your dynamic pricing optimization efforts yield appropriate results.

Only considering industry standards

While setting the prices in the mid ranges sounds like an easy out, it is also a sureshot way to kill profitability. So, use industry standards as a benchmark, but do considerable research before settling on it for yourself. After all, a $5 pack of scrunchies may be profitable for a larger brand with many customers, but it could lead to losses for a small business that is just starting out. 

Becoming indecisive

While dynamic pricing implies a state of constant change in pricing, it does not have to imply indecisiveness on the sellers part. Therefore, while it is pretty standard to have prices fluctuate, it is even more important to ensure consistency in pricing. 

Not keeping tabs on the evolution of the market

Businesses can monitor and juxtapose their rates, promotions, and stock using a range of tools and software. Hence, there is no reason not to keep a check on the market. This allows businesses a chance to identify prospects as well as risks by keeping an eye on their competition, in addition to allowing them to adjust prices accordingly. 

Over time, such competitive pricing can help a company gain market share and set itself apart from competitors.

Taking advantage of the customers

Dynamic pricing, while highly advantageous, can also have an adverse effect if not enforced correctly. Businesses should absolutely aim to address their business goals and reap profits. However, that should never happen at the expense of the customer who is intimidated by an exorbitant price point. In the end, the point is to welcome customers, not drive them away. 

Wrapping up

Today, nothing is set in stone – and prices shouldn’t be either. Plus, with the advent of so many types of shopping apps, it appears that pricing strategies will only continue to evolve. 

Dynamic pricing in e-commerce is only the beginning of this shift. However, this form of pricing not only ensures profitability, but helps brands remain abreast of the evolutions within the industry and make changes internally. Moreover, it cuts down on the manpower required to supervise pricing and instead automates the entire process. 

Therefore, for companies looking to outperform others in their niche, pricing right might just be the strategy they’ve been looking for.

FAQs

Who uses dynamic pricing?

Dynamic pricing is used by several industries and is beneficial for any industry, irrespective of their products or services. However, it is a practice largely limited to the transportation, hospitality, travel, and leisure sectors. 

What is static vs dynamic price?

Static pricing ensures that the pricing of a service or product remains the same irrespective of external factors. On the other hand, dynamic pricing strategies entail the fluctuation of cost based on several factors such as time of purchase, competition, customer demand, and quantity.

What are the types of dynamic pricing?

Dynamic pricing in e-commerce is of various types. Some of the most commonly implemented dynamic pricing strategies include time-based pricing, cost-plus pricing, value-based pricing, competitor and bulk order pricing.

How can retailers drive profitable growth through dynamic pricing?

Pricing is often one of the key deciding factors when it comes to determining product value. Dynamic pricing in particular can help with projecting a clear value proposition. It is also what drives willingness to pay and, eventually, profitability.

What are dynamic pricing tools?

A dynamic pricing tool is a software that makes pricing recommendations for products in accordance with a set of predefined parameters. Users simply state their specifications and the tool modifies the pricing to keep it competitive.

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