Unlike standard static pricing, dynamic pricing is a responsive pricing strategy whereby businesses make the cost of their goods or services flexible according to market demands. Thanks to around-the-clock price monitoring, eCommerce businesses are adopting dynamic pricing in droves-and watching their bottom-line soar as a result.
In this article, we'll unpack exactly what dynamic pricing is, where it can be best applied, and, ultimately, whether your eCommerce store should consider adopting it.
Believe it or not, dynamic pricing wasn't introduced by Uber or even the mobile-based, on-demand industry. In fact, dynamic pricing dates back over 30 years to an American Airlines promotion that saw a surge in prices during high-demand periods for air travel.
Since then, dynamic pricing has slowly crept into the retail sector. Today, eCommerce is finally moving toward dynamic pricing solutions to get the most out of every sale. Essentially, a dynamic pricing model is one that increases prices to maximize profits during high demand "boom" periods and reduces prices to increase sales during slow seasons.
Why Adopt Dynamic Pricing?
There are many reasons why a grow-oriented eCommerce retailer might want to adopt dynamic pricing, starting with market insights.
Dynamic pricing software for eCommerce retailers analyzes massive amounts of data in real-time to determine whether a product is in high or low demand and whether a price adjustment will result in an uptick in sales. Data is then stored by the service provider, who then use this data to optimize prices more intelligently in the future.
In other words, dynamic pricing sets up a positive feedback loop in which price adjustments create sales data which are then analyzed to create even better market data in the future. The end result is a boost in sales that wouldn't otherwise occur with static, non-responsive pricing.
Dynamic Pricing: Case Studies
Still not sold on the merits of dynamic pricing? Fortunately, there's hard evidence to support the idea that pricing intelligence software can benefit your bottom line-whether you own a brick and mortar storefront or an online retailer.
Consider the rapid success of Amazon, an online retailer that adjusts their prices roughly six times per hour to reflect fluctuations in supply and demand. Their massive year-over-year growth has led to other retailers, such as Target, Kohl's and Walmart also adopting price optimization strategies on their online and mobile stores.
After adopting dynamic pricing in 2013, Walmart saw worldwide online sales growth above 30 percent, with comparable growth (+28%) the following year. This should come as no surprise, as recent research has suggested that dynamic pricing responsive to "add to cart" user functions can pad gross margins by as much as 10 percent.
Similarly, Best Buy also bolstered its online shopping experience with dynamic pricing in 2013 and saw growth on-par with Walmart's (+27.2% sales volume). The success of Walmart and Best Buy goes to show how dynamic pricing mechanisms can help entice shoppers to commit to an online purchase without abandoning their cart.
E-Commerce and the Future of Price Optimization
Many of the leading eCommerce platforms have built-in dynamic pricing capabilities. However, they don't always resemble each other. At present, there are four main price optimization methods that eCommerce stores are leaning on to increase sales:
● Peak pricing
● Penetration pricing
● Segmented pricing
● Service time
Ultimately, the type of eCommerce business you own will largely determine the pricing strategy you employ.
In the transportation industry, peak user pricing has been the prevailing dynamic pricing strategy for decades. Under this model, users pay a premium during periods where demand is at its highest-for instance, during the Christmas season for air travel, or at a closing time during a night out on the weekends for taxi rides.
eCommerce stores that have limited inventory can benefit from peak user pricing by taking advantage of the inelasticity of demand. In other words, you can charge more on every sale simply because the customer is willing to pay more for the service or product.
Penetration Pricing
If you want to introduce a new product to your customers, but are unsure how successful it may be, consider leveraging the power of penetration pricing to draw them to your eCommerce store and away from your competitors'. Under this model, a new product is initially sold under market value in order to gauge its popularity, and then the price is incrementally adjusted to match its true market value.
Not everyone is willing to pay the same amount for the same product. For this reason, eCommerce stores can boost their sales by implementing a segmented, or "tiered" pricing strategy to capture as much of the market as possible.
This pricing strategy sees multiple tiers from "Value" to "Premium Plus" so that consumers with different budgets can access their product. Take, for instance, the Xbox One (base model) versus Xbox One S (upgraded) and the Xbox One X (premium version), which are priced roughly $100 apart from each other, respectively.
Many e-commerce businesses charge more for faster services. For instance, same-day service or one-day delivery can and should result in a premium service charge. This way, you can maximize profits by capitalizing on the increased demand for a higher-quality product or service from a segment of your customer base.
The bottom line is that the eCommerce industry is rapidly expanding, and vendors need to go the extra mile to maintain their competitiveness in today's changing market. Dynamic pricing and pricing intelligence software can be leveraged to boost sales, increase customer satisfaction, and maximize profits.
The future of online retail will see savvy, successful vendors employ dynamic pricing strategies, while their less-successful competitors bleed cash thanks to static pricing schemes. To stand out among the competition, harness the flexibility, personalization, big data insights, and real-time responsiveness that dynamic pricing has to offer.
