Dynamic Pricing in eCommerce

July 15, 2021
Contents: 

What is Dynamic Pricing?

To put it simply, dynamic pricing is selling the same products at different prices to different customers.

If we want to be precise, we can say that dynamic pricing is a pricing strategy in which businesses change the pricing for the products and services based both on current market demand and other external and internal factors. The prices are calculated through algorithms taking into account multiple inputs like competitor's pricing, market supply, current demand, customer behavior, and purchase history.

dynamic pricing eBook call to downloadDynamic pricing is a common practice in B2B business where the companies often negotiate 1-on-1 with a potential customer about a product or service price. In B2C on the other hand, it is traditionally used in some industries e.g. travel, tourism, hospitality. Over the last 5 years, retail businesses have been accepting dynamic pricing more and more, especially in the online sales channels.

 

Dynamic pricing can be perfomed weekly, daily, hourly, or even every few minutes.

KLIKER market offers dynamic pricing module for eCommerce that is serving price & competition analysis to your dynamic pricing software through API.

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Dynamic Pricing Examples

Probably the most widely known example of dynamic pricing is Uber and similar companies. They adapt their rates to current demand (how many customers need a ride) and supply (how many drivers are available).

All of you who have purchased an airline ticket at least once could have noticed that when you search the same route a few times, prices tend to go up. Airlines like Etihad, Lufthansa, Air China, and Emirates have been using that pricing mechanism for years now.

When it comes to retail, big (r)etailers such as Amazon, Walmart and Target have brought dynamic pricing to the everyday shopping experience, applying it to groceries and other home supplies. As one of the largest retailers, Amazon has fully adopted dynamic pricing and updates prices every few minutes.

Zalando and other online fashion platforms are also using dynamic pricing to capture the most from their current customer base.

Industries with growing usage of dynamic pricing are Fashion, Beauty & Health, Home & Garden, and Food.

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Benefits of Dynamic Pricing

There are several benefits of Dynamics Pricing for the seller, let’s comment on some of them.

  • Higher Profit

Dynamic pricing is based on real-time changes in products supply and demand. It considers the price fluctuations in the market, competitors' activity, and individual products' demand and supply. This provides you  with the right data and information to set optimal product prices and stay profitable despite the price fluctuations.

How is this saving money? There is no need for human labour to make manual calculations and related administrative tasks. Since all the calculations are done by web-based software and applications, the companies save time and therefore money, and the reduction of the overhead costs contributes to the ultimate profitability.

Besides that, having the right price for the right customer at the exact moment when the customer decides to make a purchase, leads to greater margins and finally, higher profit. This is the first and the most important reason eCommerce businesses are starting to use dynamic pricing.

  • Greater Control

Even though you can sometimes hear or read exactly the opposite, the truth is that dynamic pricing is enabling you greater control over your pricing. The retailers using dynamic pricing have real-time access to price trends across their industry, keeping an eye on the competitors' pricing and gaining a much better understanding of the supply and demand of individual products. This helps retailers to set the right prices for different products at the right time, and by doing so, to maximize the revenue and the profits.

  • Being Flexible & Saving the Brand Value

One of the main obstacles for eCommerce businesses to start using dynamic pricing is a potential damage to their brand values and customer experience. The consumers who are not aware of this practice can easily mistake different product prices for manipulation or fraud. Therefore, this is definitely a topic to worry about.

But – if dynamic pricing is properly used, one can even protect and strengthen the brand value! There should always be a price floor and/or the price ceiling reflecting the brand value (ex. price floor for premium products, price ceiling for budget, or best-buy products). eCommerce businesses can use dynamic pricing to launch seasonal and promotional offers while remaining profitable.

  • Partial or Full Automation

The only way for monitoring hundreds or thousands of products is by doing it automatically. Dynamic pricing can be fully automated (calculations and pricing) or partially automated, which is the case when software calculates the recommended price, but it must be confirmed by an administrator. Not every company is the same, so it is great you can adapt dynamic pricing to your needs.

  • Learn from errors

How can errors be a benefit, you wonder? Well, they can.

As with any man-made algorithm, dynamic pricing can also produce errors. This is the best way to learn how to set it more efficiently. Experiences of big companies like Amazon, Best Buy or Walmart show that potential errors of a fully automated dynamic pricing system do not have a significant impact on the overall profits. The price changes are so frequent that a limited number of buyers will notice the error.

There are several error-rate sites on the Internet that are gathering error prices. Isn’t that just one more way to attract new visitors, new customers?

Dynamic Pricing challenges

Let's mention some of the challenges dynamic pricing can bring, topics to be considered and discussed. 

  • Customers' Acceptance

The customers accept the changes in prices but they want to know and understand when and how. That is why seasonal and weekend sales are OK, but dynamic pricing is not. If they come to a shop on Monday, they will easily buy a T-Shirt at 20% higher price than yesterday. But if they notice the price changes on the website during the day, or that it differs online from offline, they might not be so happy.

Even though dynamic pricing can be used for customers to save money, it is often used in the opposite direction - to boost the margins of the business instead. That makes the customers feel like they are being overcharged. If the customers find out that the others paid less, they become disappointed and that can cause customers' alienation and negatively affect their loyalty.

How to deal with this?

Communication and transparency are the most important.

 

If your Terms & Conditions clearly state that the prices are subject to dynamic changes, and you use this in your marketing communications (ex. Hurry and buy now because prices might change! Special price just for you.), the customers can gradually learn and get used to price fluctuation.

  • Lost Sales

Have you heard of the ROBO phenomena: Research online, Buy offline? It has become normal today, even while customers are in the store. There is a possibility that while they are browsing the web, a product is priced lower than in-store. This can make them turn away and go somewhere else to make their purchase.

  • Gaming the System

The experienced online shoppers know that dynamic pricing models often use cookies capturing the users' behaviour patterns as one of the inputs in dynamic pricing. They know that if they browse too much around a specific item, the cost of that item might increase. That has led to an increase in using private browsers or incognito mode for product research, thus limiting the amount of information the sellers can collect through this process.

  • Price Wars

It can happen that two competitor companies both use Dynamic pricing based on the other competitor’s prices. They both want their prices to be lower compared to competition. This process continues until one business reaches the point at which the profitability comes to zero. This should be avoided.

4 Types of Dynamic Pricing

Dynamic pricing strategies can be divided into several groups:  

Segmented pricing

The perceived value of a product can be different for different segments of the customers (e.g. geographical segments). Therefore, segmented dynamic pricing offers different prices for the same or identical product. Segmented pricing is sometimes called "price discrimination", but let’s think for a moment. If you want to drink coffee in the main square, you will pay much more than in the local coffee shop. If you want to buy groceries on an island in a touristic country, you will pay 10-20% more than on the mainland, even if it is the same retail chain. Therefore, dynamic pricing is just one of the methods by which eCommerce businesses are trying to achieve the same goal.

 

Time-Based Pricing

Time-based pricing means using a time frame when the prices are higher or lower than usual. It is often used in the transportation business, like already mentioned Uber, Bolt, and similar. Or, it is commonly used in the food delivery industry where the prices of previously prepared food like sushi decrease late in the evening to sell out the remaining quantities.

 

Peak Pricing

Peak pricing strategy means that prices are higher during a product’s peak season. It can be applied to accommodation pricing during holidays, or to Xmas tree lighting and decorations prior to holidays. Dynamic pricing of such categories can be automated based on the number of searches or page visitors – as number of visitors is increasing, the prices are also growing.

 

Penetration Pricing

Penetration pricing means offering lower prices than competitors upon entering a new market. How can this be dynamic? You can set a rule to offer a 30% discount for a customer, but just for the first 2 or 3 purchases of this customer. After that, the prices will become normal again.

 

How to Implement Dynamic pricing in eCommerce?

For eCommerce to implement dynamic pricing, three things are needed:

  • dynamic pricing strategy – defining the overall strategy, for each product category or based on the product brand
  • dynamic pricing software – 3rd party or as a part of eCommerce platform
  • data source: price & competiton analytics software

How does pricing in eCommerce usually works?

eCommerce can be integrated with an ERP system, where all product data is stored and processed, including product information (naming, tech specs, etc), purchasing prices, selling prices, selling prices, stock level, sell-out data, and others. Automated transfer of product data means that the selling prices are also pulled from ERP to eCommerce system and shown on the eCommerce website. Every time price changes in ERP, it also changes online.

There are 3 points at which dynamic pricing calculation can be implemented:

  1. in ERP (like SAP dynamic pricing software)
  2. in 3rd party software that is linked between ERP and eCommerce system
  3. in eCommerce system (like Shipshape eCommerce platform Shape Core)

In all 3 cases shown above, dynamic pricing software needs inputs. The inputs can be internal sell-out data (e.g. lower the price for x%, if daily sell-out drops below 10 pcs) or supplier availability data (e.g. increase the price for y%, if stock level is low, and supplier is out of stock), customer data - geographically, demographically, behaviour (e.g. increase prices for x%, if the customer has visited the page more than 3 times) and market data in terms of competitor analysis and price monitoring.

Our Dynamic Pricing Module for eCommerce

Our KLIKER market offers exactly that – a dynamic pricing module for eCommerce that is serving price & competition analysis to your dynamic pricing software through an API.

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My Market screen in Kliker - Hungary smartphones, July 2021

The view that can usually be observed through the My Market screen and exported in Excel can also be fed to a dynamic pricing calculation. Inputs for dynamic pricing calculations can be refreshed multiple times a day or even on-demand.

For each product, the following data can be used:

  • number of retailers offering that product
  • lowest selling price
  • retailer with the lowest price
  • average selling price
  • my current price position on the market
  • ...

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Example of basic pricing analytics using KLIKER Market data

Combining market data with weekly sell-out data (roughly shown in the picture above), every eCommerce can create a great base for dynamic pricing.

Start your dynamic pricing research today: define your strategy, find pricing software and prepare data sources and inputs for price calculation algorithms. We can help you with that, so click on the button below if you want to talk with us. 

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