Dynamic pricing is the adaptation of prices according to the situation on the market in real time. The higher the number of sellers and market share, the more frequently you need to optimize the prices. Under these circumstances, there are noticeable changes in supply and demand, price elasticity as well as a fiercer competition ‘for survival’. For instance, due to the high competition on the platform, the American Amazon changes the prices each 2-3 minutes.
Not far ago, static pricing was the norm, and most offline shops stuck to the strategy of fixed prices. Clearly, competitor prices were monitored at that time as well. But as soon as the transition from offline to online took place, a lot of previously unknown and unavailable tools opening completely new capacities have appeared. These are databases’ automation, their analysis and structuring by the algorithms, and machine learning. All of that has led to the appearance of further researches and development in the field of competitive and dynamic pricing.
It would be easier to understand the principle of dynamic pricing work if you were ever interested in stock exchanges. These are two similar models. So, the success of trading securities on stock exchanges depends on changes in their cost. Firstly, the factors that influence the cost of securities are the company (brand, if we are talking about stocks), demand, and the state of the economy. The main goal is to get maximum profit. As in the case with securities, when choosing a dynamic pricing strategy, the prices of goods are adjusted depending on different factors to provide maximum growth of your profits.
1. How sales and profits depend on prices
Since sellers themselves set the prices, the question of flexible pricing is question number one for everyone. Is it true that customers choose the cheapest offer, or are they afraid of a catch? Probably, it is worth selling at an average price. Or should I sell at the highest price, though? Because if there are those who wish to buy at a high price, then the profits would be maximal, too.
Such thoughts baffle when defining the price for one product, but modern online shops have thousands of products, plus we should not forget that competitors change the prices daily. A logical solution for these tasks was the development of algorithms capable of collecting and analyzing hundreds of various parameters to define optimal prices for everyday use. It is thanks to them daily competitor price monitoring has become simple and affordable for all sellers on the Internet.
2. What Dynamic Pricing Started From
Dynamic pricing started in huge corporations that wanted to track the prices of their distributors and prevent dumping of prices on their goods. Some time later, when the number of sellers in the network had increased, the need to track the competitor prices among ‘smaller fish’ appeared too. It is clear that the necessity to quickly react and change their own prices as a response to the changes in the ones of competitors emerged as well. All of that marked the beginning of the next era in internet marketing – the era of dynamic pricing.
The whole point is that this field does not have fundamental scientific works and researches of at least a decade ago: all of them are only being formed and actively developed. And the online stores themselves appeared not long ago. But the situation surely has its advantage — those to be the first will get the best part of it. There is no doubt that dynamic pricing will be implemented everywhere in several years. And if you do business on the Internet, then you do know how important it is to be on the ball.
3. E-Commerce and Flexible Pricing These Days
Today market leaders worldwide track the prices of competitors using numerous services (Competera, RoomPriceGenie, etc.) and are highly sensitive to the changes in competitor prices by changing their own prices. As a rule, the above services require long configuration and can monitor only several competitors, losing of sight dozens or even hundreds of other sellers on the web. Surely, shortcomings like that are essential, and such huge companies end up losing millions of revenue. And there are two sides of a coin: on the one side, it is easier for such giants to implement novelties because they have money; on the other side, it is even more difficult — the size impedes speed.
What about middle-size and small online shops? The situation is even worse. In the post-Soviet space, the majority compares the prices with competitors manually by hiring a special employee for that purpose. Or they may add a certain markup to the procurement price, and that is it.
However, the competition among ‘selling’ websites is growing rapidly with every new day, and a struggle for buyers on the Internet is only becoming more expensive. And with the increase of competition, each effective way to boost your sales and profits becomes worth their weight in gold — you may either change yourself or leave. Hence, it is just a question of time until the mass connection to the services of competitor price monitoring will take place.
4. What Is ‘Dynamic Pricing’ in Online Stores and How It Works
Probably, you did not suspect that, but everyone has faced dynamic pricing. When buying airplane or railway tickets or booking a hotel room, the prices on the same items differ and are dependent on many factors: season, holidays and weekends, departure time, and even device used to search tickets. All of that is an example of efficient work of Revenue Management, and dynamic pricing is its basis.
The parameters that affect the prices in online stores are completely different. Let us enumerate them, applied to one product:
- number of competitors selling this very product on the web
- your price position
- average market price
- minimal market price
- maximum market price
- how your price differs from the average one in percent
- procurement price
- minimal profit
- covering expenses
Of course, these are only the general indicators. The main thing, the result of analysis of these parameters, is recommended price — that is the price prediction using which a seller will receive maximum profit. Actually, the story is about efficient pricing and increasing profits.
5. What Is Next: Development Prospects of Dynamic Pricing
Ideally (and that is the future that becomes the present already today), the formula of the recommended price will take into account such factors like:
1) exchange rate;
2) limited goods supply in the warehouse;
3) changes in demand of a product (seasonal or for last several days);
4) changes in traffic to the product page;
5) changes in the number of competitors on the market;
6) changes in tendencies on the market of rival goods or alternatives;7) product life cycle.
And to provide a more holistic approach to the pricing, the algorithm will calculate and correlate the recommended price depending on factual results and the accuracy of previous predictions:
- expected changes in the income after applying the recommended price
- real changes in the income after applying the recommended price
- expected changes in sales volume after applying the recommended price
- real changes in sales volume after applying the recommended price, etc.
Even today there are pioneers, product prices of which are not only defined automatically but are corrected automatically several times a day (or even more often). Primarily, that is Amazon that triggered dynamic pricing. Lately, real cases appear on open spaces of the CIS as well.
Let us discuss seven reasons why you should start applying a competitive pricing strategy ‘aiming’ dynamic pricing particularly.
6. 7 Reasons to Opt for Dynamic Pricing
1. To increase sales volume
If your prices are noncompetitive, you inevitably lose sales as well as profits. Even if today you are satisfied with the current sales volumes, using dynamic pricing will allow you to have a guaranteed increase in it (that is what every seller would like to have).
Similar to how you can see yourself in the mirror, dynamic pricing accurately reflects the changes of market supply and demand and provides actuality of your prices and high sales.
2. To increase the profitability of investments into advertising
If you have noncompetitive prices, it means that each sale costs you more. The use of dynamic pricing will bring your prices to a specific view, thus, increasing the conversion rate and profitability of investments into ads.
3. To find a balance between the turnover (income) and profits
If you are doing business, your line of thinking looks this way:
Sales —> Turnover (income) —> Profitability —> Profit
The higher sales and profitability, the higher income and profits will be respectively. But high income not always ensures high profits. The task of defining a balance between income and profits is one of the most complicated ones. And the price is its main variable.
Case 1. During the sale of Product A at a price of $30 within a week, 40 pieces were sold, and the income of $1200 was received.
The profit from one piece is $10, while the overall profit is $400.
Case 2. During the sale of Product B at a price of $25 within a week, 60 pieces were sold, and the income of $1500 was received.
The profit from one piece is $5, while the overall profit is $300.
As we can see, sales and income in the second case are higher, but the profit is lower.
A machine algorithm underlying the dynamic pricing helps to find the optimal balance between income and profit on each of the products. This strategy allows choosing the price for each separate product that would match your business goals. These may be, for example, income optimization, growth of profitability, or level of profits. For that purpose algorithms continually track and analyze the influence of the price change on key factors to reach the maximum.
4. To increase profits
If you stick to the strategy of static prices, then you either lose customers or you lose profit. Most often, merchants who sell the goods under their own brand opt for stability of prices. The set price is reviewed and corrected once a month at best. But even more often they do it once a season or even less frequently. Such tactics inevitably result in a loss of profits if the price is undervalued, or a loss of customers (and profits accordingly) if the price is overvalued.
While dynamic pricing allows being responsive to the changes of market circumstances, to measure demand, and test various prices. All of that collectively gives a chance to receive maximum profit from sales, instead of losing it, setting prices randomly.
5. To analyze the competitors
If you work in e-commerce, you definitely have got competitors. These may be either competitors selling the same product or online stores with an identical assortment. Using a competitive strategy and dynamic pricing provides you with an advantage both over the first and second ones.
6. To ensure sales throughout the year
If your business is affected by the time of the year, it means that during some months you cyclically have a drop in sales. Nevertheless, evidence shows that even seasonal goods may be sold off season: the most important thing is to set the right prices. The tools of dynamic pricing will help to analyze the seasonality and choose an effective pricing policy during drops of demand.
7. To save time
If you follow a good old-fashioned tradition to collect data about your competitors’ prices by hand, this takes a lot of time. Usually, in companies, a separate employee or even several of them are responsible for this task. Of course, price replacement in this case is also executed manually. The whole process is stretched out in time, while all the actions quickly lose actuality. One more disadvantage is that the process is really time-consuming, which always costs money.
The use of a dynamic pricing strategy will contribute to the general efficiency and will allow your employees to get rid of the need to track the competitors and change the prices manually — the algorithms will do the work. Undeniable advantages are speed and timeliness.
When developing the service of price monitoring uXprice, we tried to combine all the necessary tools for efficient pricing with the simplicity of use — integration within five minutes without a developer. In only several days after the use, you will notice the advantages of competitor price monitoring automation and an increase in profits from using pricing recommendations. The cost of checks is affordable even for small online shops: $0,035-0,05 to analyze 1 product with no limitation to the number of competitors.
Make use of the opportunity of a free test and evaluate the service potential yourself.