Dynamic pricing has become popular with businesses in the digitized world of today. It’s especially true for business that use the internet to advertise and sell their products or services to internet users. For that reason, dynamic pricing is particularly applicable with eCommerce…
Fisher 1, Gallino, and Jin (2018) describe the dynamism of online retailing as follows: “With just a few clicks consumers are able to obtain price information from multiple retailers. This increased price transparency induces fierce competition among online retailers and requires real-time monitoring and quick responses to competition.”
Indeed, with an extremely dynamic medium such as the internet, business owners need an equally dynamic pricing strategy to stay in touch with the online market. Furthermore, the successful implementation of this pricing strategy requires the use of big data and algorithms, even by smaller businesses.
What is Dynamic Pricing?
One of the antonyms of dynamic is static. So, if you’re not using dynamic pricing in your business, you’re probably happy to use the cost-plus pricing strategy, which is really not dynamic!
Dynamic pricing, also referred to as surge pricing, demand pricing, or time-based pricing is a pricing strategy in which businesses set flexible prices for products or services based on current market demands (Wikipedia).
When do you use Dynamic Pricing?
Dynamic pricing is a pricing strategy in which businesses set flexible prices for products or services based on the current market demands.
Factors that help determine a “dynamic” price include:
(Have a look at tutor2u’s video at the end of this post)
- Time of day or night. For example, a movie house charges a lower ticket price for movies that are screened in the morning than those screened in the evening (the peak time).
- Customer location. The price that the customers will pay depends on their location when they receive the product.
- Day of the week. For some businesses, changing their prices according to what day it is in the week, is a profitable option.
- Demand. When products are in high demand, it makes sense to increase the price to reflect this.
- Competitor pricing. When your competitors drop their prices, you could consider lowering yours as to not out-price yourself from the market
Determining the best-response price requires knowing how demand reacts to price changes. This is a challenging task 1. Fortunately, most eCommerce businesses have gathered lots of data (big data) over time about the dynamics of their businesses.
Undoubtedly, big data plays a crucial role to make this pricing possible. Therefore, algorithms are used to turn data into pricing decisions based around the objectives set by business – e.g. revenue maximization.
What are the Pros and Cons of Dynamic Pricing?
According to FeedDough:
Pros of Dynamic Pricing
- Higher profits and sales. When you use dynamic pricing, you’ll get to increase prices on the products whose demand have risen – resulting in higher profits and more sales.
- Reacting quickly to competitor’s prices. You can offer your customers better value for their money by giving them a better shopping experience that your competitors can. Indeed, with dynamic pricing you can customize the prizing to the needs and wants of the individual customer.
- Flexibility. The positive effect that dynamic pricing can have on your business’s bottom-line may give you more flexibility on other important aspects of your business – such as growing it.
- Improved inventory management. Dynamic pricing allows you to provide discounts for overstocked products and to charge higher prices for products that are in demand. The net outcome is that you will earn more revenue.
Cons of Dynamic Pricing
- Unhappy customers. Customers purchasing the same product but at even slightly different times means one ends up paying more than the other. This tends to upset customers who had to pay a higher price.
- Potential loss of sales. If dynamic pricing is not implemented properly, or it is used in the wrong market of situation, you may quickly lose sales. For example, if your customer comes across a generic product that is slightly cheaper than yours, you’ll lose the sale…
- Gaming the system. Most shoppers today have access to product prices online while they’re shopping. In fact, they use the internet to find and close the best deal in real time – using price as the decider. Here this pricing pricing strategy is to the advantage of bargain hunters.
- Dynamic pricing can’t be used everywhere. It works excellent in industries such as airlines and ride-sharing (Uber) and certain e-Commerce businesses. However, in other industries it proves to be a disaster. For example, Lyndsay McGregor writing in Sourcing Journal says that “Here’s dynamic pricing’s inescapable flaw: it’s reactionary. And in apparel retail, if your pricing strategy is reactionary, you lose.”
- Fluctuating prices. This is one of the main characteristics of dynamic prices. It may hurt you especially if you’re are chasing your competitor’s prices, instead of reacting to the market demand.
The reality of the Corona virus is felt by everyone, especially small business owners. Indeed, your customers are quickly busy to switch their shopping from the physical shop to the online shop.
It’s here in the virtual space of the internet where deals are going to be won – or lost. However, if you use dynamic pricing with big data and algorithms, you may survive the disruption – even to make some money!
1 Fisher, M., Gallino, S. and Li, J. 2018. Competition-based dynamic pricing in online retailing: A methodology validated with field experiments, Management Science, 64(6):2496-2514.
Feature image: PEXELS