At its core, dynamic pricing is a flexible pricing strategy that businesses utilize across multiple industries, such as entertainment, transportation, and online retail. This article will focus on its use in online retail because it is especially pertinent to this growing industry. Ecommerce will soon be a $1.5 trillion industry worldwide, so that makes now a great time to solidify pricing strategy to ensure continued success.
Static pricing is an outdated ecommerce marketing strategy in the age of big data. Using big data, online retailers are able to keep up with competitor pricing, market trends, sales volume, and more. In order to stay competitive, profitable, and on top of the game, many retailers change their pricing manually or automatically through pricing software. Dynamic pricing is an effective way to boost profit, sales, and revenue because it gives companies the advantage of nimble prices. While dynamic pricing capabilities were previously only available to giant retailers who had extensive resources, they are now widely used by online retailers who want to stay competitive and improve their profitability. But what exactly is dynamic pricing and why is it so useful for online retailers?
How Dynamic Pricing Works
Dynamic pricing is a flexible pricing strategy that businesses use to price and reprice products according to their own internal sales data, changes in the market, and other external factors. A sound dynamic pricing strategy that is able to automatically respond to fluctuations in the market optimizes profit and revenue. Dynamic pricing can help online retailers do just that.
Dynamic pricing is about more than just price changes. It is also about monitoring competitor pricing. Your price matters, but it matters more in relation to your competitor pricing. Even if you’re not necessarily looking to have the lowest price, relative price matters. This relative price needs to be flexible in order to be effective over time. There are three steps involved in creating a good dynamic pricing strategy.
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1. Monitor competitors: In order to output effective prices, online retailers must compile and analyze data on competitors and market trends. The volume and complexity of this data is one of the main reasons that online retailers choose to use pricing software, instead of attempting to do it manually in-house. This data tells them things such as how much competitors are selling the product for and how much demand there is. Knowing this information is vital because when conversions are low, your business can automatically lower product prices to help them pick back up. Another possibility is that in times when demand is high or a competitor runs out of stock, your company could raise prices to capture the money that otherwise would be left on the table. Online retailers worldwide use this strategy to maximize sales and profit.
2. Set a floor price and rules: Some products have MAP (Minimum Advertised Price) that brands set to maintain brand image, among other things. If they don’t, then you will have to decide the minimum price you are willing to sell each product for. Some retailers set a certain dollar value so that they don’t lose money in any given transaction. The next part is to determine how close in price you want to be to your top competitors. It may be a certain percentage or a within a few percentage points. Pricing is much more effective when it can immediately react to things like site traffic, competitor pricing, and sales goals.
3. Reprice and analyze: Why set prices and forget about them when you could be pricing for profit around the clock? Testing different strategies is the best way to learn what works best for your business– because no two retailers are the same. Each has unique pricing challenges that can be solved with dynamic pricing.
What Dynamic Pricing Can Do for Ecommerce
Dynamic pricing has a big impact on all the top metrics for ecommerce companies. First and foremost, it improves profit margins by 25% on average. That is because retailers have flexible pricing that can rise when competitors run out of stock or when a product is in high demand. The flipside of that is the fact that dynamic pricing can help retailers keep up with their top competitors and boost sales and conversions. When conversions are low, prices should reflect that and drop slightly in order to get sales and conversions back to an optimal rate. This also ties into regaining and maintaining a competitive advantage. If your business is able to have a competitive price while other businesses have static pricing, you will be able to improve your sales and conversions. However, this can get out of hand when retailers try to keep up with one another and continuously undercut each other’s prices. Engaging in price warscan harm brand value. Racing to have the lowest price is not a winning strategy for anyone, unless they are a “loss leader” like Amazon or Wal-Mart. Price matching is a similarly complicated strategy that only works for certain retailers.
Who’s Using Dynamic Pricing
Amazon and Wal-Mart are two of the most frequent dynamic pricers. Amazon reprices some of its products every 10 minutes and sometimes even more often than that. For retailers selling on Amazon, it can seem impossible to effectively compete with the behemoth, unless dynamic pricing strategies are in place. Wal-Mart changes its prices more than 50,000 times per month. These two loss leaders certainly don’t have the highest profit margins, but they do boast substantial market share, which can be a winning strategy in the long run.
For obvious reasons, this strategy isn’t sustainable for most retailers, but there are many lessons that online retailers can learn from Amazon and Wal-Mart’s constant repricing. Why have stagnant prices when you could bolster brand perception, sales, and profits with a dynamic pricing strategy? The market is constantly evolving and these two retailers get that. Pricing must keep up with the market in order to remain profitable.
Where Dynamic Pricing is Going
Dynamic pricing is becoming increasingly important as more online retailers enter the space. Price is one great differentiation point that retail giants have figured out. Other online retailers are catching on, which is why now is the right time to implement a dynamic pricing strategy. Twenty-two percent of retailers have already implemented price intelligence software. In the next six months, 7% more plan to begin using it and 29% will start in the next year. Here at Wiser we believe that dynamic pricing is the future of online retail because more competition is inevitable and innovative pricing strategies can help not only keep up with the competition, but get ahead. We suggest that online retailers that want to continue being viable monitor competitor pricing and market trends in order to incorporate those elements into profitable pricing strategies.
By contributing writer, Angelica Valentine, Content Marketer at Wiser .
Wiser provides a complete suite of solutions to give retailers, brands, and manufacturers the edge to stay both competitive and most importantly, profitable.
Wiser’s core product is WisePricer, full-featured dynamic pricing and merchandising engine that monitors, analyzes and reprices retail products in real-time. WisePricer enables retailers to boost profit margins and revenue, price with confidence, and improve merchandising through powering the development of a sound pricing strategy. Wiser’s Magento extension, WisePricer, was recently featured as one of Promodo’s best extensionsto make ecommerce easier.
Wiser also offers a MAP monitoring solution, WiseMapper, for brands and manufacturers to monitor and protect their pricing across the thousands of retailers selling their products.