Dynamic Pricing: Benefits, Strategies, and Examples

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Dynamic pricing is one of the most interesting topics that has taken the eCommerce industry by storm. It’s not a completely new and unfamiliar concept for companies. However, it’s development is more related to new eCommerce trends. Having that in mind, there are some things that you should know in order to make this concept more understandable.

Learn more about the Essentials for eCommerce dynamic pricing.

dynamic pricing

1. What is dynamic pricing?

Dynamic pricing is also referred to as surge pricing, demand pricing, or time-based pricing. This is a pricing strategy in which businesses can set flexible prices based on current market demands. To put it more simply, this is a strategy in which product prices continuously adjust. It may be in a matter of minutes, hours or days, depending on the type of the market.

If we go a little bit back in time, we can see the questions have captured the companies attention. How many people want some product? How much product is there in stock? how much product varieties exist? how many competitors are out there? Nowadays, real time pricing uses more advanced data and ways to make this process faster.

2. Main benefits of pricing changes

In today’s eCommerce pricing changes became one of the most important tools to work with and for several reasons. One of them is making quicker and more profitable changes in terms of sales.

This way your business becomes more aware of market changes and can act with much more flexibility. For example, if some item is overstocked, the necessary reduction can be performed by offering discounts.

Of course, price optimization offers you a possibility to track and adjust the prices to your competitors. Another benefit is having a better insight into industry trends. You would be able to gain valuable insights. Which items are most bestselling? By which competitors, and by what price?

Learn more about the advantages and disadvantages of dynamic pricing.

dynamic pricing benefits

3. What types of dynamic pricing strategy exist?

Dynamic pricing strategy can appear in a few forms. Each of them can be used for achieving different goals.

  • Segmented pricing: This strategy offers different prices for different customers. That means that the customers are divided into segments. For example, high-value customers can be offered higher prices. Here we can assume that they might put service speed and quality over the price.
  • Time-based pricing: Companies can use this product pricing method when they want to charge more for providing some faster services. This means that you’re going to pay more if you want to have same-day service, or if you reached the company close to the end of the working hours.
  • Changing market conditions: As you are aware, the situation on the market can change due to various factors. However, businesses must act accordingly. If for some reason sales begin to fall, the company will go for the strategy of lower prices.
  • Peak pricing: This strategy can be used by many industries to charge more during the peaking hours.
  • Penetration pricing: Penetration pricing strategy is used when businesses want to reach a large portion of the market. By doing so, future customers get familiar with the offered product. In order to do so, companies set prices that are below the market prices and tend to increase them gradually.

Click here to learn more about differencies between dynamic pricing and price discrimination.

4. Would this pricing model work for you?

There are some things that you can do to make this product pricing strategy work for you. First comes the transparency towards customers regarding your prices. Customers must always be informed about the factors on which the price depends. Another useful way of implementing this strategy would be through motivation some of the customer’s behavior. For example, peak pricing helps widen profits during peak hours.

Some of the largest digital retailers in the world, such as Amazon, have implemented dynamic pricing and enjoyed huge benefits. However, some industries use this strategy all the time and in a very successful way. Maybe the best representative example would be airfare pricing.

What makes the airfare so prone to price variations? First of all, airline companies are aware of different types of passengers. They can be roughly divided into leisure and business travelers. Both of them need this service, but their behavior is quite different. Leisure travelers are (generally) more flexible with dates (meaning that they tend to plan their trips). Business travelers have to travel on a certain day and often at a certain time.

This means that leisure travelers tend to book tickets in advance. The business ones are often obliged to make some last-minute reservations, willing to pay more. So, as we get closer to the departure date, the only seats available are the more expensive ones. Also, there are some dates during the year when the demand is always higher – holidays for example. Airfare prices can vary also depending on the day or on the airline company.

dynamic pricing in airline

Click here to learn more about the repricing efficiency in the different industries

5. Things to avoid in dynamic pricing models

Based on all the above, it might seem that this strategy has no week points. However, if not used carefully, product pricing may very easily become a double edge sword. Even though is used for comparing prices on the market, it must never be used as a tool for price discrimination.

Some companies, such as Uber, had to learn that in a hard way. Uber operates as a low-cost ride service. Thereofre, the decision of raising the price during rush hour was met with serious public criticism. To make the situation even worse, Uber started implementing this method during a snowstorm in New York. That resulted in Uber being accused of exploiting its customers.

6. How to implement pricing changes?

So far you become somewhat familiar with the concept of this differential pricing strategy. But how can you implement dynamic pricing into your business?

Whit so many competitors in the market it’s getting harder and harder to keep up. This can be managed effectively with the right software. Monitoring hundreds of thousands of different products is an extremely challenging task, beyond the scope of most eCommerce businesses. One of the solutions that can help retailers to overcome this task is offered by Price2Spy software which you can see in action if you start your 30-day free trial.

Wapping it up

This pricing strategy can cause some serious problems if it is not used properly. At the same time it’s clear that it offers a huge specter of possibilities for businesses and customers as well. As we’ve seen, the price is not firmly set. It changes depending on the type of product, industries, market conditions, demand on certain year time and of course, on the type of customer being targeted.

This strategy became very common in some industries. As time goes by, there are more and more industries of all sizes and types willing to try this method.

Also, with increased competition in the eCommerce market, retailers are faced with the tough challenge of maximizing profits. Of course, while keeping their prices competitive. This is also the situation where dynamic pricing comes as an ideal solution.

What are your thoughts on pricing strategies? Let us know, we’d be happy to hear from you!

 

About Price2Spy

 

Price2Spy is an online service that provides comprehensive and suitable solutions for eCommerce professionals including; retailers, brands/manufacturers and distributors in order to stay profitable in the current competitive market conditions. If you want to learn more about what Price2Spy can do for your business, please get a personalized free demo or start your 30-day free trial.

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About Price2Spy Blog

This blog is a place for eCommerce professionals to discuss ideas, methodologies and strategies to compete more effectively in the ever more tightening world of online retail. We explore things like competitive price monitoring, competitor business intelligence, competitive pricing, and counter-intelligence in general.

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