Dynamic pricing; you’ve probably heard of it and there’s a good chance that you’re confused by it. You might even be scared off by it due to the recent drama caused by Uber riders who received bills of several hundred dollars due to “surge pricing” on Halloween. However, the aim of this article is to separate fact from fiction once and for all.
Dynamic pricing is often portrayed negatively because it means that consumers are paying different amounts for the same goods. But what about sales and promo codes? Shoppers end up having different totals for the same goods anyway, which is just one reason why online retailers should throw out the gossip they’ve heard about dynamic pricing and give it some real thought.
How a Dynamic Pricing Strategy Works
As a pricing strategy, dynamic pricing boils down to changing prices based on market forces and internal factors. Market forces are generally out of a retailer’s control, like competitor pricing, demand, and more. Internal factors can range from quantity in stock to historical sales volume. These two come together like a superhero tag team because they ensure that your back is always covered. This is crucial since villains (I mean competitors…) are lurking around every corner of the internet. Even a momentary lapse in pricing acumen can result in significant loss of revenue and profit.
Online retailers that use dynamic pricing often use it in two ways. First, they use it to drop prices when their competitors do, or when they need to clear out stock of certain items. This is definitely the most talked about function of dynamic pricing.
A lesser known, but equally important use of dynamic pricing is price increases. You read that right. Sometimes the best thing to do is raise your prices. Some instances that warrant a price increase include a competitor running out of stock or when you’re the only seller on the market with a particular product.
Retailers can raise prices to bring in more profit when demand is high, and lower prices to increase revenue when demand is low. Of course it can get more complex by taking into account a number of pricing variables such as price elasticity to really figure out how price fluctuations impact conversion rates. From these, retailers can learn what maximizes sales and margins and stick with that strategy.
Who Is Leading the Pack
Amazon and Wal-Mart are two giant retailers that are putting dynamic pricing to good use and definitely reaping its benefits. Amazon uses dynamic pricing because it is hyper-competitive and takes its status of loss leader very seriously. Amazon is one of the top 10 retailers in the US and raked in $44 billion in sales last year. Prices on certain items change every 10 -15 minutes to drive sales and stay competitive consistently.
Wal-Mart is another mega retailer that is using dynamic pricing to its advantage. The low-price leader implements about 50,000 price changes every month. Wal-Mart is definitely an interesting case to follow because its online sales growth outpaced Amazon for the first time in 2013 (30% vs. 27%). On top of that, a recent Kantar Retail study cites that Amazon’s basket is 17% more expensive than Walmart.com’s. It’s clear that online retail competition and dynamic pricing usage will only skyrocket from here.
How You Can Get in on the Fun
There are many pricing strategies that online retailers can use, from anchor pricing to segmented pricing. Many of these are tried and true, but dynamic pricing sticks out as a newcomer. While the strategy has been alive and well in the airline industry for years, online retailers are just starting to catch on to the revenue and profit boosting potential that dynamic pricing offers.
There is a three step plan for taking a data-driven approach to make dynamic pricing a reality:
- Collect competitive pricing and assortment data
- Identify and prioritize where you aren’t competitive
- Set your pricing strategy and evaluate the results
Big box retailers have proven the positive impact of dynamic pricing on the bottom line and now it’s up to all other retailers to make it the new standard.
Blog post by Angelica Valentine, Content Marketing Manager, Wiser