Pricing products correctly is one of the most challenging aspects of running a business. You want to charge customers a fair price that accurately reflects the value of the product. And it’s important that it’s perceived the right way. Too low, and you’ll have a shortage and an unsatisfied demand from your customers. Too high, and you’ll lose out to your competitors and annoy your shoppers.
Making the whole scenario more difficult is the fact that there are many additional factors to consider when determining your pricing strategy. Changing markets, seasonal fluctuations, inflation, varying demand, competitor pricing, and resource availability all affect how something should be priced. This is where dynamic pricing strategies come in.
Though a more modern term, dynamic pricing has always been around. But there are some newer options that retailers can employ to optimize their prices in order to maximize profits. Below we’ll cover the basics of dynamic pricing, its pros and cons, and several of the most popular types of dynamic pricing.
A dynamic pricing strategy is when a business continuously adjusts its prices over a short time period. In some cases, the pricing is changing by algorithms throughout the day. In others, the pricing is changing less frequently and done so manually.
In the end, the goal of using dynamic pricing is to find the ideal margin level for each product and to maximize the total volume of sales.
Unlike personalized pricing, which bases its pricing on individual consumer behavior, dynamic pricing is based on the market and how it determines the relative value of each product.
Dynamic pricing has become more commonly used with the rapid rise of eCommerce selling. Consumer electronics were one of the first categories of retail to implement the technology. Because the industry is highly competitive and the demand highly elastic, dynamic pricing helps the industry optimize its prices.
Which Types of Businesses Can Use This Pricing Model?
Dynamic pricing is used in hundreds of industries. Most famously, Amazon has implemented dynamic pricing models for many of the products sold on its eCommerce platform.
Typically, businesses that are in a highly competitive market are good fits for dynamic pricing. Even better is if the product’s demand is highly elastic. This means that there will be large swings in the demand of the good or product. And it’s important that prices accurately match demand.
Among many others, below are several industries that have successfully implemented dynamic pricing:
Large eCommerce platforms
Remember, dynamic pricing has always been around. Playoff baseball tickets, for instance, have always been more expensive than a day game in May. What’s changed, though, is the technology behind it. Instead of making manual changes based on hunches or gut feelings, these modern pricing systems use vastly complex algorithms to constantly optimize prices for thousands of products.
How Can Businesses Implement Dynamic Pricing Strategies?
If you think that dynamic pricing might be beneficial to your business, start exploring the idea and take the time to make sure it’s the right fit before implementing anything into your business’s practices.
Set Clear Goals
Like a business plan, make sure you know exactly what you’re hoping to achieve before you put any strategies into practice.
Do Your Research
Look at what your competitors are charging and if they’re using any dynamic pricing. Notify your staff of any changes your thinking about. If you use salespeople or any employees with extended contact with your shoppers get feedback from them. They know your customers better than anyone.
Choose the Right Dynamic Pricing Strategy
Look at different ways that you can adjust your pricing and which products would be best suited for pricing changes. Don’t make changes en masse across your entire store. Treat it as you would any other broad retail marketing strategy.
Use the Right Implementation Tactics
Think about how you’ll start making adjustments to your pricing. You don’t want to change everything at once. Think about seasonal changes, demographic pricing, time-based discounts, and any other factors that might affect your final pricing.
Test It Out
Like any major change, it’s absolutely vital that you monitor its impact on your store. Most businesses can afford to let costly mistakes go unchecked for too long. Make sure you’re paying attention to your margins and that no adjustments are wrecking your bottom line.
Look at AI Dynamic Pricing Software
The world’s biggest retailers are investing massive amounts of money into new AI companies that manage the dynamic pricing of their products. Such technology is hardly feasible for most small retailers, but that is likely to change in the near future.
These software solutions test out your products at different channels and locations. They track a myriad of factors including shopping history, competitor pricing, past sales volumes, and supplier pricing. The AI will then make small adjustments to your prices. They’ll continue to tweak prices to get more feedback as they go. Over time, the AI will narrow in on optimal prices for each of your products.
What Are the Different Types of Dynamic Pricing?
There are many different ways of using dynamic pricing. Certain strategies will work better for certain types of businesses. Take a look at the following to see which might be wise to implement at your store.
While you want to reward your best shoppers you don’t want to offer discounted pricing for consumers who were planning on happily paying full-price.
High Demand Items
Your most popular items should never be put on sale. Keep these prices high and err on the side of charging too much of a premium.
Back-to-school marketing, Black Friday sales, seasonal weather trends, to name just a few, are great times to adjust your pricing. Follow the trends and market expectations to put the right things on sale at any given time.
Try out different pricing strategies on new items. Generate hype with an initial sale or promotion and then adjust the pricing over time to zero in on an optimal range.
Pay attention to your competitors to make sure that you’re not overpriced. Retail showrooming is a growing phenomenon and it’s putting some retailers out of business.
Sell the same product at different prices on different channels. There are varying degrees of this.
First-degree price discrimination is the simplest – businesses simply charge the maximum amount for each product based on the channel in which they’re selling it.
Second-degree takes quantity sold into account. Bulk purchases will be cheaper per unit.
And third-degree discrimination is based on the individual consumer. Student rates or ladies’ nights are examples of this.
Only use price discrimination if it makes sense cost-wise for your business or if it’s bringing a direct benefit to your shoppers. Take third-party selling fees, shipping costs, supplier pricing, etc. into account before implementing this technique. You need to be able to understandably justify the price to your customers.
Specifically for retailers carrying new-to-market products, price skimming makes the initial price quite high since consumers who are quick to adopt new products will typically pay a premium to do so. We often see this with new tech products. Once the technology becomes more ubiquitously used and more competitor products hit the market the price will start to come down.
Some retailers use this as a way of gaining new customers who would otherwise be priced out of the product. Luxury hotels commonly use this tactic. Rather than let a room go vacant, they’ll lower the price of available rooms shortly before the date of stay to attract guests on a budget.
Be careful not to let your customers get into the habit of waiting until the last minute for deals to appear. Training them into expecting a discounted rate is a dangerous path.
What Are the Pros and Cons of Dynamic Pricing?
Messing with your pricing can be a great tool for your business. But it’s a risky game. Going too low can decimate your margins and ruin your revenue stream. Going to high can alienate your shoppers and, in the end, also ruin your revenue.
And remember that there is no single solution or answer for any business. It’s a remarkably complicated thing and one that big-box retailers are investing millions of dollars into each year just to learn more.
Pros of Dynamic Pricing
It’s flexible. You can set prices in real-time to better match the factors that affect your margins. This helps you maximize revenue and remain competitive.
It will save you money. Implementing the software might be costly, but optimal pricing will increase your sales and profits in the long run.
And with increased profits, your business can grow at a faster rate. Dynamic pricing will increase your rate of sales, your profit margins, and therefore allow you to scale accordingly.
Cons of Dynamic Pricing
Inconsistency isn’t a hallmark of a well-run business. Consumers don’t like to be surprised, especially with unexpectedly high prices. Don’t scare them away.
Price wars can ruin a business. Just because a competitor is offering something at a lower price doesn’t mean that you should automatically match it. It could well be the case that their margins are floundering.
Be wary of changing prices based on shopper demographics. Consumer discrimination is, in some cases, illegal. And even if it’s legal, it will still be rather off putting to most consumers.
Get the Right Software to Monitor Changes
Overall, take the time up front with proper research, A/B testing, and incremental changes. Altering a pricing strategy can have a huge impact on any business, so don’t treat it lightly.
And once it’s up and running, using the right software to monitor any changes is critical. KORONA can break down individual product performance so you can monitor the success of any change. And dozens of custom retail KPIs make it even more powerful. Click below to learn more.
Among other things, Michael writes about trends and tips in retail for KORONA POS. His focus is on bringing small business owners a more holistic approach to growth. In his spare time, you'll find him hiking somewhere in the southwest. Connect with him on LinkedIn: https://www.linkedin.com/in/michael-chal/