The goal of every single ecommerce retailer is to find a solid way that leads them to improve their business. Personalized and segmented emails, delivering a great user experience and customer support, publishing good performing ads… The list goes on. All of these efforts have a great impact on the success of an online business. But in this article, we would like to tap into a mysterious area – having an effective pricing strategy through dynamic pricing to boost ecommerce success.
While dynamic pricing is not a completely new approach, ecommerce retailers have been using it more of late. Most of them were randomly optimizing their prices and changing them manually based on internal decisions. However, because of the increase in online price competition, and thanks to greater market intelligence and sophisticated dynamic pricing software, ecommerce retailers have realized the importance and the impact of dynamic pricing on their businesses.
What is dynamic pricing?
In basic terms, dynamic pricing is a pricing approach that enables you to set flexible prices by taking into account your costs, desired profit margins, the demand of the market and your competitors’ prices. In other words, you’ll be able to set the optimal price at the right time in response to real-time demand and competition status, while taking into account your business goals.
Why is dynamic pricing important?
The most apparent case is retail giant Amazon, who changes and updates its prices every 10 minutes and increased its revenues by 27.2%. Another big player, Walmart, adopted dynamic pricing and changed its prices 50,000 times a month. Using this pricing model, its sales jumped by 30% in 2013.
Dynamic pricing also lets retailers have additional and valuable insights on industry trends. Ecommerce retailers can apply different price limits and analyze price elasticities before deciding the optimal product price. A great way of testing and optimizing your prices is through paid ads. For example, Google Shopping provides instant data on how online shoppers are responding to your new price. You can analyze conversion rates, impressions, CTRs and margins after changing prices. By making continuous tests, you can find the optimal price.
The benefits of using a dynamic pricing strategy are abundant: improved margins and revenues; better conversion; control on the market; personalized prices based on season, demand and demographic; and presence in price comparison engines. As such, your prices always stay competitive and optimized in the ecommerce market.
Dynamic pricing use-case scenarios
If you are managing an ecommerce store, you should seriously consider adopting a dynamic pricing model with the right technology, since it has a significant impact on business success.
Here are some proven dynamic pricing use-cases that you can face in your industry:
- Demand-based pricing
If the general or seasonal demand for your product is at low level, then you have to eliminate the excess stock in order to get rid of the extra costs. The most common practice is to drop prices as low as possible to increase sales.
On the other hand, if demand is high in the market (it can be a seasonal effect or instant hypes), it would be great to increase your prices for the purpose of boosting profits.
So in a nutshell, demand-based pricing lets you benefit from demand fluctuations in the market like increasing prices when demand is high or when your competitors’ products are out of stock.
Identifying your competitors’ out-of-stock products – through a competitor price monitoring tool, Amazon Bestseller, or tracking Google Trends – would give you great insight in understanding market demand and the most popular products over a certain time period.
Moreover, ecommerce retailers can apply a dynamic pricing strategy for some seasonal opportunities that occur during the holidays or shopping frenzies.
- Time-based pricing
Time-based pricing is a dynamic pricing approach which enables ecommerce retailers to optimize their prices based on certain times of a day, month, year or the lifespan of a product in the market.
Different to demand-based pricing, as time is the core element rather than instant hypes in demand, the time-based pricing model is more predictable.
Let’s go through some real examples. The most popular industry using the time-based pricing approach is airline ticket providers. You should definitely notice that airline ticket prices are much higher in holiday seasons when compared with a regular season in the year.
Time-based pricing also works well if a product is outdated. Electronics brands use this strategy to increase the demand for an old version of a product. Whenever Apple releases a new version of a product, the price of an old version is marked down for the purpose of attracting more customers.
Through time-based pricing, you’ll always be aware of market trends as well as what your rivals are offering. With that intelligence you can always know where and when to decrease or increase your prices.
- Competitive pricing
There are hundreds of competitors in the market and they adjust their prices continuously. That’s why you should also monitor them and take actions based on the pricing competition in the market.
If you deny your competitors then you won’t know if you’re priced too high or too low among them. That lack of information causes you to detach from the market.
In that scenario, you’ll face low conversion rates or slim margins which harm your sales and business growth. This is because your competitors are acting competitively and are more aware of market trends.
Do you know why?
The statistics show that majority of online shoppers compare prices before finalizing their purchase by visiting at least 3 online stores. Moreover, most of them name price as the very first criteria for their purchasing decision.
In a nutshell, because of price competition in the ecommerce space, online pricing becomes one of the key elements that influences the purchasing decision. So, retailers should be very attentive with their management and optimization.
Think about a scenario in which one of your competitors applies discounts and undercuts your pricing. With dynamic pricing, you can automatically react to its discounting strategy and regain your competitive status again.
Your prices may be too competitive when compared to your closest rival. So, even an increase of 10% or 20% won’t harm your competitiveness in the market. To grab at this opportunity, you need fresh competitor intelligence and dynamic pricing. By investing in both, you will be able to retain your competitiveness and increase your profit margin.
How to ‘really’ apply dynamic pricing to your strategy?
As mentioned above, Amazon is a huge fan of repricing!
Now let’s see how to apply this smart strategy!
Having tons of data is great. But, the crucial thing is to convert data into actionable insights. Fortunately, there are dynamic pricing and repricing software in the market that help you to generate recommendations from the data that you’ve collected from competitors. Then, the technology lets you calculate optimal prices through repricing rules that you’ve set based on your competitors’ prices, market demand and costs.
Once the optimal price rules are set, then you can enjoy the rest! The repricing engine works all day and your prices will be changed according to the fluctuations in the market and, of course, based on the rules that you’ve set. With the mix of competitive intelligence and repricing ability, your business can gain a seamless competitive advantage in the market. As you’re able to react to every single move in the market, your prices will always stay competitive or optimized.
Let’s give an actual example:
There are two different retailers competing in the same category:
- The first retailer named ‘Great E-Commerce Retailer’ is selling all types of products from almost every category (electronics, home & kitchen appliances, fashion products, sports products,… the list goes on…)
- The second retailer named ‘Super Sport Retailer’ specializes in the sports category.
Then, imagine that these retailers are competing harshly over price in the ‘football shoes vertical’. To take advantage of repricing technology and find the most optimal price, the below rule for Super Sport Retailer can be set;
My prices for every product under ‘football shoes category’ should be 10% lower
than ‘Great E-Commerce Retailer’
but they should be at least 15% higher than my costs
After setting this rule and assigning it in the repricing engine, ‘Super Sport Retailer’ will always have competitive prices in the football shoe category that won’t veer lower than its costs.
Repricing in ecommerce is key to remain competitive and grow your business online.
So, what are your thoughts on dynamic pricing and repricing? Have you ever tried it on your ecommerce store? If yes, what are your experiences? Please don’t hesitate to share all of them with us at Prisync.