Dynamic Pricing

E-commerce | 9 Mins Read

Dynamic Pricing

eCommerce is an incredibly competitive space. Market intelligence firm PipeCandy estimates that there are more than 1 million eCommerce players in North America alone. 

According to an NPD study, 85 percent of consumers think price is the most important factor when making a purchase. Put these two facts together and you have one of eCommerce’s big conundrums: how do you know your price is right when millions of other competitors are selling the same products you are?

Dynamic pricing is the answer. 

A lot of factors — from logistics to supplier stock levels to the weather  — have an impact on the cost to you of a product at a given moment in time. On the other hand, customer factors, such as ability to pay and elasticity of demand, play a big role in defining the prices customers are willing to pay. This means you have the opportunity to sell the same product at different times to different people, while making an optimal profit. 

An effective dynamic pricing strategy can ensure that you’re offering buyers the best possible price at all times, drawing sales your way. It’s important to understand, though, that dynamic pricing isn’t as easy as running an algorithm, sitting back, and letting the sales role in. Being too hands-off with dynamic pricing can actually hurt sales and damage your brand image. You need to identify and implement the optimal dynamic strategies that maintain trust, and offer prices that excite your customer. Let’s take a look at a few ways you can leverage dynamic pricing to win more sales.

Remember to stay hands-on


Your pricing strategy speaks volumes about your brand value. It’s not a good idea to make your product pricing fully dependent on an algorithm. Use dynamic pricing algorithms to find price bands that you’re comfortable with, but implement limits to dynamic price changes. It’s important to understand that pricing is a big factor in customer trust.

If customers see your prices fluctuating all the time, they’re less likely to see you as a reliable partner. Sudden changes in pricing can also make the purchase experience worse. There’s nothing more annoying than a product price increase moments before you tap on the checkout button. To minimize these effects, make sure to be hands-on with dynamic pricing.

Be in control of your price changes


Set limits on how frequently prices can fluctuate. That could be a few times an hour or a couple of times a day. The key here is to give customers a feeling of price stability. You should also take intangible factors into consideration. How will a certain price-point reflect on your brand? If you always offer the lowest prices, customers might see you as a value-for-money option. Is that the brand image you want to build? Your pricing sends a message to customers. Be hands-on so that you control it.

Implement price differentiation, not discrimination


No one likes feeling as if they’ve been treated unfairly. A key issue with dynamic pricing is that the price one customer pays isn’t necessarily going to be the same as the price another customer pays. Someone’s always going to be paying a higher price, and no customer wants to be that person. Customer pushback over Uber’s surge pricing model, described by the MIT Technology Review as “efficient price gouging,” is a case in point.  

 It’s important to note, though, that different customers are willing to pay different prices for the same product. Customer willingness is affected by a range of factors, from income levels to geography, to education levels, to interests. An educated, high-income customer from an urban area whose hobbies center on your product, will likely pay a higher price for a given product than other customers. 

It’s lazy, though, to just charge different customers different rates. What’s worse, it’s unfair. Your dynamic pricing strategy shouldn’t discriminate against different customer groups. Instead, think outside the box to devise price differentiation strategies.

The same product can mean different things to different people


Products mean different things to different customer groups. They ascribe different values to it based on this. 

For example, in emerging economies with growing middle classes, fast food outlets like Dominos and Taco Bell hold a considerable amount of aspirational value. They are places people are proud to dine out at. International fast-food chains enhance the aspirational aspect by furnishing outlets with premium decor. And of course, they charge premium rates for tacos, too. 

In developed countries, where fast food outlets cater more to working-class populations, the messaging tends to be focused on the value proposition. Burritos are pricier in developing countries, and it’s not because they cost more to make. Understand that, even though you’re selling the same product, you’re selling different experiences to different people.

Conclusion


There’s no getting around the fact that competition is intense in the eCommerce space. Dynamic pricing isn’t a solution for all the challenges you face. As a matter of fact, it isn’t even a differentiator: almost all the biggest eCommerce outlets use it. However, it’s a great idea to implement dynamic pricing as an integral part of a customer-friendly marketing strategy. At the end of the day, your objective should be to deliver the best products to your customers at the right prices. Pricing is one factor here, among many.
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