What Is Dynamic Pricing?—A Path to Maximizing Profit
Updated · May 31, 2022
In today's ever-changing marketplace, businesses must be adaptable in order to survive.
One way that businesses are meeting the challenge of shifting customer demand is through the use of dynamic pricing.
Join us as we discuss this pricing strategy, by explaining what it is, its benefits, some potential downsides, and how existing ecommerce stores are putting it to work.
What is Dynamic Pricing
Dynamic pricing is a pricing strategy that charges different prices for the same good or services. The change can be because of demand— where a business charges more for in-demand products or less for products they’re having trouble selling.
It can depend on the time of day, or even the season, where buying slumps have been identified.
The change can also be in response to the prices of competitors. Used alongside strategies like product matching, businesses can adjust their prices to be more competitive than their competitors.
Many tend to focus on the ability of dynamic pricing in ecommerce to maximize pure revenue by being able to always sell at an optimal price, but it also has a part to play in conversion rate optimization. By adjusting pricing one can find the point at which the most customers are willing to buy.
Is Dynamic Pricing Legal?
We understand that this sounds a little “tricky”, and because of this, many wonder if dynamic pricing is legal. The answer is yes… depending on how it’s done.
In order to be legal, dynamic pricing can’t discriminate against protected categories, such as race, gender, or nationality.
Instead, dynamic pricing must be done in response to market factors like going rate, or time. It must also be “reasonable.”
For example: If the demand for bread is particularly high due to an earthquake damaging infrastructure, and a shop increases its bread prices by 500%, a dynamic pricing model becomes price gouging.
Many countries have regulatory boards that punish price gougers, so it’s important to be careful when adjusting prices. A safe rule to follow is to avoid dynamic pricing for necessities and to avoid doing so in response to social, economic, or environmental strife.
Benefits of Dynamic Pricing
Now that you know what dynamic pricing is, let’s take a close look at some of its benefits.
First off, as we’ve mentioned, it allows businesses to maximize their profits. It also allows for some flexibility. If a business is a market leader, being able to drop prices slightly on short notice, can lead to a boost in business.
Moreover, dynamic price optimization can help businesses balance their inventory management, by allowing them to shift stock quickly when they have too much, or temper demand if they have too little.
As a benefit to buyers, it could often let them grab deals at below-market prices if they shop around.
Downsides of Dynamic Pricing
Of course, there’s always another side to the coin, so what are some of the downsides to dynamic pricing?
The first applies when dynamic pricing is done manually. If a business isn’t using an automated tool for its dynamic pricing strategies, or they have poor data, they could end up losing money or business, because the prices aren’t optimal.
The second is largely in the realm of customer relations. Dynamic pricing can create animosity among customers who are charged different prices for the same product or service.
This can lead to negative reviews and bad publicity, which can damage a business' reputation and bottom line.
Finally, dynamic pricing can complicate a business’ accounting. Because a business doesn’t know exactly how much each unit will sell for, it becomes harder to predict exact outcomes. Plus it requires a more granular process when tallying sales. Tallying at least can be taken care of with automation.
Dynamic Pricing Examples
A good example of dynamic pricing is Amazon’s model. The emperor of ecommerce is always at the forefront of every development, so it’s no surprise that it makes use of dynamic pricing.
Amazon’s use of dynamic pricing is all about being competitive. It constantly monitors the prices of competitors and drops its prices when needed. According to research by Minderest, Amazon changes prices an average of four times a day, by as much as 20%.
Minderest notes that Amazon changes prices gradually, in order to maximize profit. It’s looking for the balance between the most attractive prices, and the most profitable ones.
AirBnB is a company that uses a dynamic pricing algorithm to assist its users. It suggests prices to users based on an algorithm, which it claims helps users get more bookings.
Dynamic Pricing Tools
There are a number of tools that exist to help businesses with dynamic pricing. They take the form of SaaS and integrations for various ecommerce platforms.
One popular option for Amazon sellers is Repricer Express, which helps to automatically adjust prices based on demand and competitor prices.
There are also various dynamic pricing integrations that are available for platforms like Shopify, for those who create their own stores.
These integrations, which cost a monthly fee, can help monitor prices, and even allow users to create automatic “pricing rules” that will adjust in response to demand and the prices of competitors.
Now you can confidently answer the question “What is dynamic pricing?”
Dynamic pricing is a powerful tool that can help businesses to maximize profits and stay competitive in today's marketplace.
While there are some potential downsides to using this pricing strategy, most can be overcome with automation, and the advantages far outweigh the risks.
With the right tools in place, dynamic pricing in ecommerce can be easily implemented and managed, freeing up time and resources that can be better spent on other areas of the business.
Garan is a writer interested in how tech reshapes the environment, and how the environment reshapes tech. You'll usually find him inoculating against future shock and arguing with bots.