Dynamic Pricing – How to Use it in E-Commerce

Introduction

E-commerce is one of the most dynamic industries ever. According to Shopify, global e-commerce sales will total $6.3 trillion worldwide in 2024. 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.

Obviously, price is one of the major deciding factors 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 are no longer sufficient. Plus, the price levels are no longer constant. With thousands of stores and millions of products, it can change by the hour. 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. So what do you need to know about this solution?

Dynamic pricing algorithms continually track current market demands and prices, 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 fully utilize their margin potential – maximize profits and improve the positioning of their offer.

Let’s use a quick example to show you how dynamic price works. First, take a look at these listings:

Initially, 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 result in moving 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. First, the dynamic pricing algorithm will never apply changes that are detrimental to your profit. You can set a minimal profit margin, so 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.

Dynamic pricing examples

Travel industry

Everyone who has ever tried to book a plane knows that 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 an airline ticket, the higher the price. It works the same in the hotel industry. Visit the same offer on Airbnb or Booking.com twice, and the second offer will most likely be higher than the first one.

Rideshare services

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 transportation based on several factors, i.a., the customer’s location, time of day, traffic patterns, and even their user history with Uber.

Ads

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.”

E-commerce

That’s the natural environment for dynamic product prices. E-commerce stores use dynamic pricing methods to offer the best deals on:

• Their websites
• Marketplaces
• Price comparison engines

Types of dynamic pricing

As we mentioned earlier, dynamic pricing can work differently depending on your commercial goals and the rules you set. These predefined pricing rules can be as follows:

• Top 3 offers on the particular platform
• The price difference between the 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 the competitor’s market position
• Low inventory (handy with end-of-line products and clearance sales)

With that in mind, we can single out four different dynamic pricing types.

Segmented pricing

This model is frequently called price discrimination, as it displays different prices for different market segments. In a segmented pricing model, the same product can be displayed at several different prices based on who’s looking for it.

Time-based pricing

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.

Peak pricing

This model is very similar to time-based pricing; only here, we don’t concentrate on the time of day but the time of year. So the same hotel room will cost you more during peak seasons such as Christmas or the holiday season and less in early spring or fall.

Penetration pricing

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 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.

Better visibility

For starters, dynamic pricing gives you much better visibility in all the sales channels. Since your prices are profitable and attractive from the customer’s perspective, you end up high in every search, especially when a given person filters listings from the cheapest to the most expensive.

Higher profit

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 or your online store is the only one 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, companies using dynamic pricing make substantially more money than their competitors who don’t use this service.

Time savings

As mentioned earlier, staying on top as an e-commerce retailer is extremely difficult. Prices and offers change dynamically, and 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 competitor prices 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 extremely 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. 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, 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 over 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 that you want to stick to.

Conclusion

If you run an e-commerce company, we encourage you to try dynamic pricing. Today, this strategy is a good help in the never-ending battle for the customer in the ever-changing market. Companies that use dynamic pricing can sell more products, increase conversion rates, and save time on price tracking. Dynamic pricing helps maximize profit while also improving customer satisfaction. These benefits are invaluable for every online retailer!

If you want to know more, visit Dealavo’s website and see their offer for dynamic pricing.

Frequently asked questions