Years ago, we got used to airline tickets fluctuating in price and then Amazon began dominating online retail and put their own version of dynamic pricing to work.
Since then, dynamic pricing has become increasingly commonplace in online retail.
With its growing popularity, any retailer that didn’t have some form of dynamic pricing implemented might risk missing out on increased margins when competitors run out of inventory. On the other end of the spectrum, a retailer could be missing out on sales opportunities if a competitor drops their prices, leaving that retailer with a relative price that is way too high to be competitive.
Dynamic pricing is still relevant because online retail is as competitive as ever, which means it’s harder to capture pricing opportunities (to maximize margin or revenue, depending on your strategy) in real-time.
‘Retail winners’ overwhelmingly find dynamic pricing more effective than price matching – 65% of retail winners and 46% of others agree with that statement, according to an RSR Research study. It’s not about pricing lower, it’s about pricing more intelligently. Dynamic pricing means pricing according to internal and external variables, such as stock levels and competitor prices. You need timely, accurate data in order to do it right.
Dynamic pricing benefits
1. Keep up with market trends
Retail moves fast. You may have the best price in the market one moment and be beat by multiple competitors the next. With dynamic pricing, retailers can stay up to date on competitors’ prices, as well as other pricing and inventory trends, and automatically incorporate those variables into new pricing. Imagine manually trying to keep up with market trends and repricing your SKUs based on that data before the market changes. Sounds impossible, doesn’t it?
2. Boost stagnant sales
Are your sales lackluster or do you need to clear inventory faster? Discounts are necessary sometimes, but it’s important to ensure you don’t price too low, or too high. With dynamic pricing, you can lower prices to meet your revenue goals by incorporating market trends, internal stock levels, and competitor data to find the most ideal price.
3. Maximize margins
On the flip side, dynamic pricing can be used to identify when you can raise prices to maximize margins without negatively impacting revenue. For example, perhaps your top competitor is priced significantly higher than you, or you are the only seller in the market. In both of these scenarios, you can test higher prices to estimate demand elasticity.
If you’re managing a large number of SKUs, perhaps the most important consideration is whether the pricing strategy you have in place is scalable. Only then can you ensure sustainability and long-term success. Many retailers have invested in building technology to support the dynamic pricing process or have turned to third-party providers to automate what was once an extremely tedious, manual, and inaccurate process.
Common misconceptions about dynamic pricing
While the benefits of dynamic pricing are clear, many retailers are hesitant to implement such a strategy due to some common fears:
Will dynamic pricing deplete margins?
Dynamic pricing is often associated with Amazon’s aggressive price slashing strategy, and many retailers worry that changing their prices based on competitor pricing will force them into a margin-depleting price war. After all, most retailers can’t afford to be as aggressive on price as Amazon.
A few ways to prevent this domino effect from happening include setting price guards to make sure your pricing never goes below a certain price and incorporating other pricing variables, besides competitor pricing, into the equation.
Will consumers be turned off by dynamic pricing?
Another company that is often associated with dynamic pricing is Uber. Trying to call an Uber during a peak time can be 10x the normal cost, and consumers certainly didn’t take kindly to surge pricing. While that’s an extreme example, it’s a reasonable concern that consumer sentiment may suffer.
But consider this: consumers are used to sales and discounts. This is no different, in the sense that consumers end up paying different prices for the same items. While incredibly frequent price changes are most likely not the right strategy, carefully implemented price changes at the right time can be a win-win for both retailers and savvy shoppers.
In addition, just like the price guards mentioned above can protect your margins from falling below a given threshold, you can also set an upper bound to ensure your prices are always in line with your brand identity and customer expectations.
Dynamic pricing in retail is plagued with misconceptions, but Amazon’s success with it proves that it is worth the time and effort. While customers might take some time to get used to the concept, rest assured they will. As a retailer, dynamic pricing is more relevant than ever because it helps them make the most of existing traffic and sales. Pricing can fluctuate within an ethical framework and still keep shoppers happy.