E‑commerce is one of the most dynamic industries ever. According to Shopify, global e‑commerce sales will total $5.5 trillion worldwide in 2022. In such a challenging environment, there are many boxes to tick if you want to succeed and outrun your competitors. Many of them are related to your offer and prices. And that’s what we want to talk about today. Dynamic pricing is an automated strategy that helps e‑commerce business owners maximize profits and increase sales. How is that possible? And how does dynamic pricing work? Let’s have a look.
Price is one of the major decisive factors both in retail and e‑commerce. Online trade encouraged people to browse different offers to find the best (cheapest) one. This doesn’t mean that only a store with the lowest prices can thrive in this sector. Other elements, like additional services (e.g., express delivery), reputation, and customer experience, also matter. However, it is beyond doubt that you need to offer attractive prices if you want to grow your business and increase sales.
Today, static pricing techniques like, for example, cost-plus pricing is no longer sufficient. Plus, the price levels are no longer constant. It can change by the hour with thousands of stores and millions of products. This means that you need an intelligent way of setting and optimizing prices in your online business. And dynamic pricing solution is by far the best way to get there. What do you need to know about this solution?
What is dynamic pricing?
It’s a pricing strategy that uses intelligent algorithms and automation to set and maintain optimal prices. Dynamic pricing algorithms continually track prices on the market and, based on predefined rules (set by the user), adjust your store’s prices to remain competitive. Today, online stores use dynamic pricing software to utilize their margin potential fully – maximize profits and improve the positioning of their offer.
Let’s use a quick example to show you how dynamic price works. Take a look at these listings:
In the initial situation, our hypothetical store had the most expensive offer and landed in the fifth position – not the best place to be. If you look at other prices, you’ll see that the actual difference between our current offer and the cheapest one is just 2.01 EUR. Concerning a product worth 500 EUR, that’s nothing. But such a seemingly insignificant change can move from the fifth position to the first one. And, of course, the first position gives you much better visibility, so you will likely close more deals, even though you’ll make slightly less on each TV sold.
Thanks to dynamic pricing algorithms, such changes can happen automatically. You don’t have to track price fluctuations at your competitors’ stores; the algorithm does that for you. As a result, you can make significantly more money because your offer is always at the top.
Now, let’s say two words about these predefined rules. The dynamic pricing algorithm will never apply detrimental changes to your profit. You can set a minimal profit margin to make so that the price doesn’t go too low. Moreover, you can add more such rules, e.g., focusing on a specific sales channel. If you want to keep good visibility in Google Shopping, you can decide for your offer to stay in the top 3 cheapest offers in a particular product category in this channel.
But dynamic pricing isn’t limited just to e‑commerce. You can see real-life examples of this strategy in several market sectors.
Examples of dynamic pricing
Airlines and hotel industry
Everyone who has tried to book a flight knows there can be substantial ticket price differences for the same flight, and they can change several times a day! How is that possible? Because of the dynamic pricing algorithms. They track consumer demand for specific flights. The more people are interested in purchasing a ticket, the higher the price. It works the same in the accommodation sector. Visit the same offer on Airbnb or Booking.com twice, and most likely, the second offer will be higher than the first one.
In 2019, Forbes published an article with a suggestive title: Uber Charges More If They Think You’re Willing To Pay More. It analyzes the dynamic pricing model used by this carrier. Uber uses a model that exploits multiple price points. As a result, they can easily manipulate the price for the transportation based on several factors, i.a., the customer’s location, time of day, traffic patterns, and even their user history with Uber.
You can also display dynamic prices in ads that you run online. Google Ads has this feature that enables users to show three different prices based on current circumstances:
- Default price
- Sale price
- Regular price
Which price you show and how often is only up to you. As Google informs us on their website, users “can use code to determine how to display prices, depending on whether an item has a sale price and whether the sale price differs from the regular price.”
That’s the natural environment for dynamic product prices. Online stores use dynamic pricing methods to offer the best deals on:
- Their websites
- Price comparison engines
Types of dynamic pricing
As we mentioned earlier, dynamic pricing can work differently depending on your goals and the rules you set. These predefined rules can be as follows:
- Top 3 offers on the particular platform
- The price difference between two competitors
- Below/above selected numerical attributes (e.g., the price should include a minimum margin of 5%).
- Below/above-selected competitors
- Increase/decrease by a specific amount/percentage
- By the product cost
- Based on competitor market position
- Low inventory (handy with end-of-line products and clearance sales)
With that in mind, we can single out four dynamic pricing types.
In this model, you display different prices for different market segments. This model is frequently referred to as price discrimination. In this model, the same product can be displayed at several different prices, based on who’s looking for it.
That’s what transportation companies do – when the demand for a given product changes throughout the day, it can be lower or higher depending on how many people are interested in it at this particular moment.
This model is very similar to time-based pricing; only here, we don’t concentrate on the time of day but on the time of year. So the same hotel room will cost you more during Christmas or holiday season and less in early spring or fall.
Here, the price depends mainly on the company’s market position. At first, when you don’t have many customers, you start with super-low prices to get more traffic and interest. Then, as your position matures and people start to recognize you, the price increases. Read more about penetration pricing.
What are the benefits of dynamic pricing in e‑commerce?
This strategy has several vital benefits, and companies that use it daily confirm that it contributes to their growth and visibility. But let’s be more specific.
Dynamic pricing benefits
For starters, dynamic pricing gives you much better visibility in all the sales channels. Because your prices are profitable and attractive from the customer’s perspective. You end up high in every search, primarily when a person filters listings from the cheapest to the most expensive.
Sales-wise, dynamic pricing is all about making more money. It’s a common misconception that these algorithms only lower prices. If your offer is already the lowest one or if you’re the only store offering a specific product, the algorithm can increase the price for you (provided such a change doesn’t affect your position adversely). As a result, dynamic pricing companies make substantially more money than their competitors who don’t use this service.
As we mentioned earlier, staying on top of things as an e‑commerce retailer is extremely difficult. Prices and offers change dynamically; if you wanted to track these changes manually, you wouldn’t have time for anything else. With dynamic pricing software, you don’t have to monitor your competitors daily – the algorithm does that for you and responds immediately to changes that could affect your position or sales.
How to use dynamic pricing in e‑commerce
It all starts with finding a provider with such a service in their offer. Designing a dynamic pricing algorithm from scratch would have been highly costly and time-consuming. Even the most prominent companies opt for ready-made solutions because the best dynamic pricing platforms are fueled by artificial intelligence to maximize their efficiency.
How it works
First, you must determine the products you want to use dynamic pricing with. Once you have such a list, you can define rules for these products (there can be different rules depending on the product category, sales channel, and even location). Next, the dynamic pricing platform imports data from the market and your ERP system or e‑commerce platform to propose optimal prices for your store. In most instances, the user can decide to automate price changes or approve them manually every single time. The rest happens automatically.
What is needed for integration
Usually, the dynamic pricing platforms use integration through API so that you can integrate them with your store seamlessly regardless of the ERP system or the e‑commerce platform. Sometimes, e.g., with WooCommerce, it is possible to use a direct integration, which streamlines the process. The second element needed is a list of products (in the form of EAN codes).
How to choose a provider
There are several platforms out there that provide a dynamic pricing engine. Compare offers, prices, and the scope of the service. Not every provider offers international service, so your choice is somewhat limited if you operate in more than one market. Select the offer that will allow you to achieve your business goals. Dynamic pricing is generally scalable, but you should ask about potential obstacles and limitations before signing the dotted line. Our partner, Dealavo, offers dynamic pricing and price monitoring tools in more than 32 countries.
How to craft a dynamic pricing strategy
There is no one-fits-all strategy. It all depends on many factors, such as:
- Your niche/market sector
- Your competitors
- Products that you offer
- Channels that you exploit
- Your business and marketing goals
In essence, dynamic pricing is an automated tool. It doesn’t need a comprehensive strategy to do its job. All you need is a list of requirements and rules you want to stick to.
If you run an e‑commerce company, we encourage you to give dynamic pricing a shot. Today, this strategy is a good help in the never-ending battle for the customer. Companies that use dynamic pricing can sell more products, earn more money, and save time on price tracking. These benefits are invaluable for every online retailer!
Frequently asked questions (FAQs)
What is dynamic pricing?
It’s a pricing strategy that uses intelligent algorithms and automation to set and maintain optimal prices in an online store, mainly to ensure a high profit and good visibility of a particular offer in selected sales channels (marketplaces, price comparison engines, and online stores).
What is an example of dynamic pricing?
A good example showing how dynamic pricing strategy works is the airline sector. The airline industry adjusts its prices based on several factors (e.g., seat availability, time to departure, previous searches, etc.). As a result, the same plane ticket can have many different prices.
Why is dynamic pricing important?
The answer is threefold. First off, dynamic pricing helps you maintain good visibility in all the major sales channels. For example, thanks to predefined rules, you can decide to be in the top 3 best offers on Amazon or Google Shopping, thus ensuring good visibility of your listing. Secondly, because dynamic pricing algorithms always try to set the most profitable price, they help you increase your profit margin. As a result, you make more money on the products you sell. And thirdly, these algorithms monitor competitive offers for you and respond to price changes. You don’t have to do that manually, and you can save time.
How can I implement dynamic pricing?
In most instances, you can’t do that on your own. You need a provider or a platform that offers a dynamic pricing tool. Many dynamic pricing providers enable seamless integration with your e‑commerce platform. One of them is our partner, Dealavo.