Dynamic pricing is a pricing strategy in which prices change in response to real-time supply and demand.
While this isn’t a brand new pricing strategy, (American Airlines first introduced it in the early 80’s) it is currently taking ecommerce by storm.
Dynamic pricing allows retailers to remain competitive with 24/7 price monitoring and changes, boosting profits by 25% on average.
How does it work?
Well, dynamic pricing gives retailers the flexibility to decrease prices to increase sales when they’re sluggish and increase prices to generate more profit when they’re booming.
What are the benefits?
Many retailers opt for pricing intelligence software that has the ability to scan Amazon for thousands of products every 10 minutes, lifting the burden of manually tracking competitors.
Pricing intelligence software has already caught on as 22% of retailers have chosen to implement it. An additional 7% plan to start using it within the next six months and 36% in the next year.
This shouldn’t be surprising, since research has found that price optimization software improves gross margins by 10%.
Dynamic pricing also provides retailers with additional insights on market trends. Retailers can implement different price levels and observe price elasticities before finding the optimal market price.
Amazon, one of the largest retailers that uses dynamic pricing, changes its prices every 10 minutes on average. The company saw a 27.2% increase in sales from 2012 to 2013 and generated over $44bn in sales just last year. This resulted in Amazon being named one of the top 10 retailers in the US for the first time.
A leader in the loss-leader pricing strategy, Walmart, also changes its prices roughly 50,000 times a month. In 2013, its global online sales grew by 30%, a growth rate that topped Amazon’s for the first time in 5 years. Walmart’s success has continued well into 2014 with a 27% increase in global web sales in just Q1 alone.
Best Buy and Sears also incorporate dynamic pricing into their pricing strategies. Best Buy’s online sales increased by 25% in 2013 and has already seen a 20% increase in 2014. Sears also implemented price changes to about 25% of its products during the holiday season. It experienced a 17% increase in online sales in 2012.
How does one start to weave dynamic pricing into existing pricing strategies?
Here are the top dynamic pricing tactics for online retailers:
Segmented pricing. Appeal to a larger market with segmented pricing. Using this strategy, retailers have tiered prices from value to premium in order to capture as much of the market as they can.
Apple has recently started using this strategy for its iPhones, creating a value product to complement its premium product (5C and 5S, respectively).
Apple also uses segmented pricing for other products, fluctuating its prices according to how much memory each item holds.
Peak pricing. Peak pricing allows retailers to take advantage of fluctuations in demand, increasing prices when demand is high or when competitors have low inventory.
Retailers could utilize this strategy during the holidays when consumers have high demand for various products while shopping for gifts for their loved ones.
This could also be used when there is a special event such as a championship game approaching. Consumers would want to properly represent their teams with shirts, caps and more.
Retailers could capitalize on this by slightly increasing prices to accompany the increase in demand.
Time-based pricing. You know what they say, out with the old, in the with the new. Time-based pricing allows retailers to adjust prices according to the time of day or how long a product has been on the market.
Retailers can increase the demand for an older product by marking it down. Microsoft used this strategy when pricing its game console, the Xbox. It originally had the Xbox 360 priced at $399, however when the Xbox One was released, with motion sensing technology, the Xbox 360 was marked down to $299.
Penetration pricing. Trying to introduce a new product into the market but unsure of how consumers will receive it? Penetration pricing allows retailers to set a lower price than the eventual market price in order to persuade consumers to try their product.
Not only will this attract consumers to your store, it would pull them away from your competitors. Retailers can then gradually increase prices as the item becomes more and more popular.
As the ecommerce market becomes increasingly competitive, retailers need to be able to easily monitor their competitors and the market as a whole. Pricing intelligence software and dynamic pricing allow for this and incorporate other factors such as the level of demand and conversion rates.
What are other ways that dynamic pricing can help online retailers get ahead? Sound off below!
Contributing Writer: Amanda Lin