Dynamic pricing is a hot topic in the retail market. Airlines have been using it for years with great success. Retailers of any size, especially in the eCommerce market, could stand to benefit from implementing a dynamic pricing strategy. But what is dynamic pricing really, how does it work? This article will guide you through all the basics of dynamic pricing to get you started.
Traditional Pricing Methods
Before we get into dynamic pricing itself, we need something to compare it to. The most common traditional pricing methods are fixed and variable pricing, which can be explained as the following: As its name implies, fixed pricing involves setting the price of an item, usually determined by factors such as manufacturing costs and revenue margins. Fixed pricing is rigid, and its main pitfalls lie in the fact that it cannot account for many other factors that may affect revenue and sales targets. Variable pricing aims at fixing this rigidity. It involves changing prices based on region, time of year, and other factors that may influence the demand for certain products. Accounting for other factors that fixed pricing does not can lead to higher profit margins, so traditionally it was the go-to for companies looking to grow and remain competitive.
Why traditional pricing methods fall short
You probably noticed that the last few sentences about variable pricing were in the past tense. That’s because times have changed - the pace of the retail market is considerably faster thanks to the internet. Also thanks to the internet, competition is everywhere. Consumers have the ability to look at multiple offers for the same product in just a few mouse clicks, and companies who cannot keep up with this fast pace will inevitably fall behind.
Dynamic Pricing
That’s where dynamic pricing comes in. Dynamic pricing can account for many variables both small and large which may impact demand and sales, creating a more accurate price to increase profit margins. Dynamic pricing can account for a plethora of variables that change in a matter of minutes or hours, like the weather. All of these smaller factors fall into three main variables that determine prices for the most part when implementing dynamic pricing:
Supply: If your product is offered by many retailers across the market and is not unique, customers have a variety of sellers to choose from, resulting in lower prices. Alternatively, if your company has a strong brand image and/or unique products, ideal prices might be higher according to this factor.
Demand: Many variables that affect pricing falls into the overall category of demand. As said before, things like weather can affect demand for a certain product, such as beach towels or umbrellas. Demand for a good may increase or decrease during a certain time of year, or it may vary depending on the region it is being sold in. For these reasons, demand is a very important factor to consider especially for eCommerce retailers who sell goods worldwide.
Competitor Behavior: Knowing what goods you have in common with key competitors and how they are pricing their goods is vital in implementing dynamic pricing effectively. For example, you may have the perfect price according to supply and demand, but if a rival retailer is offering the same product on discount, your offer is now less than ideal, leading to a decrease in sales. For this reason, competitor tracking and dynamic pricing tend to go hand-in-hand with each other.
Implementing Dynamic Pricing
Understanding how dynamic pricing works is the easy part. What is more complicated is figuring out exactly how to implement it. If you are hoping to manually account for all of the factors that impact pricing multiple times per day, you may be dismayed to hear that it is not that easy. In order to consider all the factors changing your prices and crunch the numbers in a timely manner, you are either going to need a team of some very speedy mathematicians, or you are going to need a decent pricing software. Pricing software, also called price management software, dynamic pricing software, and price tracking software is the most common tool used by retailers to implement a dynamic pricing strategy. Using advanced algorithms (and sometimes using the help of machine learning), pricing software can go through thousands of items in your category, compare them to your competitors, consider factors like supply and demand, and give you the right price for your products within seconds. Most can also automatically change the prices of your goods depending on market fluctuations so you don’t have to do so manually, but you typically also have the option to ignore what the software recommends and change prices yourself. Whether you listen to what the pricing software tells you or not, it is a fantastic tool to implement dynamic pricing, and unless you’re selling an extremely small category of goods or you are a very amazing math genius yourself, it is likely the only realistic way you can maintain the right prices at all times. Considering this, implementing dynamic pricing is about as simple as buying good software and using it.
Conclusion
Dynamic pricing is a great way to keep up with a volatile market and fierce competition, especially for eCommerce. Nearly all retailers stand to benefit from changing their prices often according to the ebbs and flows of the market; it can make your business more competitive and give your company a chance to increase profit and sales margins. That being said, implementing dynamic pricing requires competent pricing software in order to reap all the benefits it has to offer. Technology like pricing software plays a huge role in keeping up with modern market demands and is your best bet to start using dynamic pricing in your company as quickly and easily as possible.
