What is Dynamic Pricing in eCommerce?
To put it simply, dynamic pricing is selling the same products at different prices to different customers.
If we want to be precise, we can say that dynamic pricing in eCommerce is a pricing strategy in which businesses change the pricing for the products and services based both on current market demand and other external and internal factors. The prices are calculated through algorithms taking into account multiple inputs like competitor's pricing, market supply, current demand, customer behavior, and purchase history.
Dynamic pricing is a common practice in B2B business where the companies often negotiate 1-on-1 with a potential customer about a product or service price. In B2C on the other hand, it is traditionally used in some industries e.g. travel, tourism, hospitality. Over the last 5 years, retail businesses have been accepting dynamic pricing more and more, especially in the online sales channels.
Dynamic pricing can be performed weekly, daily, hourly, or even every few minutes.
Types of Dynamic Pricing strategies
Dynamic pricing strategies can be divided into several groups:
The perceived value of a product can be different for different segments of the customers (e.g. geographical segments). Therefore, segmented dynamic pricing offers different prices for the same or identical product. Segmented pricing is sometimes called "price discrimination", but let’s think for a moment. If you want to drink coffee in the main square, you will pay much more than in the local coffee shop. If you want to buy groceries on an island in a touristic country, you will pay 10-20% more than on the mainland, even if it is the same retail chain. Therefore, dynamic pricing is just one of the methods by which eCommerce businesses are trying to achieve the same goal.
Time-based pricing means using a time frame when the prices are higher or lower than usual. It is often used in the transportation business, like already mentioned Uber, Bolt, and similar. Or, it is commonly used in the food delivery industry where the prices of previously prepared food like sushi decrease late in the evening to sell out the remaining quantities.
Peak pricing strategy means that prices are higher during a product’s peak season. It can be applied to accommodation pricing during holidays, or to Xmas tree lighting and decorations prior to holidays. Dynamic pricing of such categories can be automated based on the number of searches or page visitors – as number of visitors is increasing, the prices are also growing.
Penetration pricing means offering lower prices than competitors upon entering a new market. How can this be dynamic? You can set a rule to offer a 30% discount for a customer, but just for the first 2 or 3 purchases of this customer. After that, the prices will become normal again.
Of course there is also competition based pricing strategy, probably most simple option. It is usually very effective for sales growth, but has negative impact on your margin. This strategy is adoptable for industries selling the same or similar products.
Supply and demand dynamic pricing strategy
One of the biggest advantages of online sales (vs Brick and Mortar) is the data. With your First party data and Third party data (for now) every eCommerce owner have available a lot of data about that can help to detect product that are not optimized. Example is info about how many people has visited some product and how many people have bought that products (Conversin rate). . If conversion rate is lower than average we can apply rule to decline price lets say for 1%, than we track changes in conversion rate and if needed apply new rule.
How to Implement Dynamic pricing in eCommerce?
For eCommerce to implement dynamic pricing, three things are needed:
dynamic pricing strategy – defining the overall strategy, for each product category or based on the product brand, it is Your job :) For example, do you want to maximize Turnover or Profit?
dynamic pricing software – yes, we have it :) You can implement it by yourself or hire us. For full automation API integration is needed.
data source (competitor price scraping software), yes, we have that also :)
How pricing in eCommerce usually works
eCommerce is integrated (ideally through API) with Dynamic Pricing software, where all product data is stored and processed. Data that is usually used from ecommerce include basic product information (naming, tech specs, etc), purchase prices, selling price, stock level, sell-out data, and others. Scraping software will track your competitor prices (plus stock level, promotions etc) and send them to Dynamic Pricing software. With the data about your prices, competitor prices, stock level, promotions, sell-out data, seasoning etc Dynamic pricing software will calculate optimal price level for your products and implement it to your ecommerce solution.
Implementation of new prices can go automatically (Dynamic pricing software will change prices on your ecommerce solution by itself) or suggested new prices can go to approval before implementation.
Dynamic pricing is a transformative pricing strategy that has the potential to revolutionize the way businesses operate. By understanding the meaning and benefits of dynamic pricing, companies can harness its power to stay ahead of the competition, optimize revenue, and meet customers' ever-changing demands. Embracing dynamic pricing not only enhances profitability but also offers a more personalized and satisfactory experience for customers, ensuring long-term success in today's dynamic market environment.