What is Dynamic Pricing in eCommerce?
Updated: Apr 1
Examples of Dynamic Pricing
What is Dynamic Pricing
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 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.
Dynamic Pricing Examples
Probably the most widely known example of dynamic pricing is Uber and similar companies. They adapt their rates to current demand (how many customers need a ride) and supply (how many drivers are available).
All of you who have purchased an airline ticket at least once could have noticed that when you search the same route a few times, prices tend to go up. Airlines like Etihad, Lufthansa, Air China, and Emirates have been using that pricing mechanism for years now.
When it comes to retail, big (r)etailers such as Amazon, Walmart and Target have brought dynamic pricing to the everyday shopping experience, applying it to groceries and other home supplies. As one of the largest retailers, Amazon has fully adopted dynamic pricing and updates prices every few minutes.
Zalando and other online fashion platforms are also using dynamic pricing to capture the most from their current customer base.
Industries with growing usage of dynamic pricing are Fashion, Beauty & Health, Home & Garden, and Food.
Benefits of Dynamic Pricing
There are several benefits of Dynamics Pricing for the sellers, let’s see some of them.
Higher Profit with Dynamic pricing
Dynamic pricing is based on real-time changes in products supply and demand. It considers the price fluctuations in the market, competitors' activity, and individual products' demand and supply. This provides you with the right data and information to set optimal product prices and stay profitable despite the price fluctuations.
How is this saving money? There is no need for human labour to make manual calculations and related administrative tasks. Since all the calculations are done by web-based software and applications, the companies save time and therefore money, and the reduction of the overhead costs contributes to the ultimate profitability.
Besides that, having the right price for the right customer at the exact moment when the customer decides to make a purchase, leads to greater margins and finally, higher profit. This is the first and the most important reason eCommerce businesses are starting to use dynamic pricing.
Greater Control over your pricing strategy
Even though you can sometimes hear or read exactly the opposite, the truth is that dynamic pricing is enabling you greater control over your pricing. The retailers using dynamic pricing have real-time access to price trends across their industry, keeping an eye on the competitors' pricing and gaining a much better understanding of the supply and demand of individual products. This helps retailers to set the right prices for different products at the right time, and by doing so, to maximize the revenue and the profits.
Being Flexible & Saving the Brand Value
One of the main obstacles for eCommerce businesses to start using dynamic pricing is a potential damage to their brand values and customer experience. The consumers who are not aware of this practice can easily mistake different product prices for manipulation or fraud. Therefore, this is definitely a topic to worry about.
But – if dynamic pricing is properly used, one can even protect and strengthen the brand value! There should always be a price floor and/or the price ceiling reflecting the brand value (ex. price floor for premium products, price ceiling for budget, or best-buy products). eCommerce businesses can use dynamic pricing to launch seasonal and promotional offers while remaining profitable.
Partial or Full Automation of pricing strategy
The only way for monitoring hundreds or thousands of products is by doing it automatically. Dynamic pricing can be fully automated (calculations and pricing) or partially automated, which is the case when software calculates the recommended price, but it must be confirmed by an administrator. Not every company is the same, so it is great you can adapt dynamic pricing to your needs.
Learn from errors
How can errors be a benefit, you wonder? Well, they can.
As with any man-made algorithm, dynamic pricing can also produce errors. This is the best way to learn how to set it more efficiently. Experiences of big companies like Amazon, Best Buy or Walmart show that potential errors of a fully automated dynamic pricing system do not have a significant impact on the overall profits. The price changes are so frequent that a limited number of buyers will notice the error.
There are several error-rate sites on the Internet that are gathering error prices. Isn’t that just one more way to attract new visitors, new customers?
Dynamic Pricing challenges
Let's mention some of the challenges dynamic pricing can bring, topics to be considered and discussed.
The customers accept the changes in prices but they want to know and understand when and how. That is why seasonal and weekend sales are OK, but dynamic pricing is not. If they come to a shop on Monday, they will easily buy a T-Shirt at 20% higher price than yesterday. But if they notice the price changes on the website during the day, or that it differs online from offline, they might not be so happy.
Even though dynamic pricing can be used for customers to save money, it is often used in the opposite direction - to boost the margins of the business instead. That makes the customers feel like they are being overcharged. If the customers find out that the others paid less, they become disappointed and that can cause customers' alienation and negatively affect their loyalty.
How to deal with this?
Communication and transparency are the most important.
If your Terms & Conditions clearly state that the prices are subject to dynamic changes, and you use this in your marketing communications (ex. Hurry and buy now because prices might change! Special price just for you.), the customers can gradually learn and get used to price fluctuation.
Have you heard of the ROBO phenomena: Research online, Buy offline? It has become normal today, even while customers are in the store. There is a possibility that while they are browsing the web, a product is priced lower than in-store. This can make them turn away and go somewhere else to make their purchase.
Gaming the System
Price War with Dynamic pricing software
It can happen that two competitor companies both use Dynamic pricing based on the other competitor’s prices. They both want their prices to be lower compared to competition. This process continues until one business reaches the point at which the profitability comes to zero. This should be avoided.
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 does 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.
Our Dynamic Pricing solution for eCommerce
Our Solution offers exactly that – a Dynamic pricing software (web app) for eCommerce, Price scraping software and API interface.
If needed ERP integration is possible, for example to get future stock level or purchase price.
If your present ecommerce solution have some limitation, our company is also provider for Custom ecommerce solutions.
With our ecommerce solution dynamic pricing is integrated in CMS:
Market screen in Kliker - comparation of prices on market
Start your dynamic pricing research today: define your strategy, find pricing software and prepare data sources and inputs for price calculation algorithms. We can help you with that, so click on the button below if you want to talk with us.