Dynamic pricing has certainly been gaining traction in the online retail space. Popular in industries like hospitality and sports entertainment, dynamic pricing has led to the retail price tag's obsolescence in those industries. Why? Because it is a symbol of static pricing, a tactic that holds many retailers back from success in the ecommerce landscape.
Retailers are no longer inhibited by physical price tags that require time and employees to manually change. That's why dynamic pricing is a growing practice in online retail. Dynamic pricing is a pricing strategy that gives businesses the power to change their products' prices in accordance with changes in the market and competitor prices.
Have you ever checked on the same flight twice in the same week and seen that the price had increased the second time? That's dynamic pricing hard at work. However, dynamic pricing in retail does not hold the same frustration for consumers. It has led to an increase in competition online, which ultimately benefits online shoppers.
Consumers often benefit from dynamic pricing thanks to frequent price cuts. And if retailers have the data to engage in the strategy but can't afford to compete with low prices, they find innovative ways to improve the customer experience with tactics such as live chat. Other retailers can occasionally reprice, but Amazon is still the reigning champion of dynamic pricing.
Amazon's data-driven approach has allowed them to aggressively pursue (and succeed at) their loss leader strategy. By intelligently lowering their prices in order to compete against other retailers, they were able to capture huge market share, though margins had to be sacrificed along the way. The company really took the famous Jeff Bezos quote "your margin is my opportunity" to heart.
If you're a retailer considering dynamic pricing, there's obviously one big question on your mind: how do you find the middle ground? You don't want to frustrate customers like airlines sometimes do, but at the same time you don't want to undercut all of your competitors and deplete your margins. The line between the two has grown thin, but walking it does not have to be an incredibly painstaking process. Here are three steps to help you find the middle ground to implement a successful dynamic pricing strategy.
1) Use Clean Competitive Data
A well-balanced dynamic pricing strategy starts with your competitor data. This pricing data helps you establish the range of prices you can use to stay competitive. Unfortunately, competitor data is not always perfect.
Missing or incorrect pricing data can be frustrating for retailers. Sometimes UPC numbers get fudged, and your pricing data actually pertains to the wrong item. If your data shows your competitor's t-shirt at hundreds of dollars, they probably aren't daring to make some extra money. You probably just accidentally matched your t-shirt with an expensive item!
According to WIPRO, 64% of retailers don't actually have a well-defined policy for analyzing data. If you want to successfully carry out a dynamic pricing strategy, you can't be a part of that percentage. Having a savvy business analyst can go a long way towards keeping your data clean and identifying these illogical errors to translate to the needs to your IT team for data cleanup.
Combining expertise between business and technical stakeholders will help you create a robust data cleansing service. The industry bests will collect as much raw data as possible, set up data cleansing, and then feed the "pure" data to their algorithms for optimization.
2) Test Your Prices
Once you have squeaky clean data, you can start working to discover the optimal price for your products. What works well for one retailer may not work at all for another. That's because behind every purchase decision, there are several factors that help determine the optimal price, such as brand value, shipping costs, competitor prices, price elasticity, and more.
So how do you find the right price? Just as you would test a web page layout, you can actually A/B test your pricing strategies. Analyzing how different prices affect your bottom line, sales revenue, and conversion rates can help you find the optimal price for you and your customers.
You'll quickly learn that you don't always need to have the lowest price to win the sale!
Testing dynamic pricing strategies can lead to a 3% lift in profits in just two months, according to a test Wiser ran with one of our clients. This is from weekly and biweekly price fluctuations of elastic products. Price testing helps you find the price that is most appropriate for your brand and your customers. Using this type of data-drive strategy can help you make informed decisions about your pricing.
3) Be Dynamic, Not Discriminatory
There have been reports of certain retailers using demographics to determine prices throughout the day. For example, if they saw a shopper visit using an Apple laptop, the prices would be higher than someone using a PC. They have also increased the price for customers farther away from brick and mortar stores. While it is an opportunity, it's pure price discrimination, and it's wrong to use it on your customers.
Fluctuating prices between two customers is not only wrong, it can also be illegal. Instead of using individual customer traits and demographics to price your products, let the market and your internal business strategy dictate and justify prices. It's like your entry-level economics class all over again. The market will determine the price, and it's up to you to follow that price or alter it to make a sale.
An increasing number of retailers are taking hold of Amazon's wisdom and are beginning to implement dynamic pricing strategies, for a good reason. Amazon has been the 800 pound gorilla in the room for too long, and dynamic pricing gives retailers of all sizes the opportunity to compete against a company as large and resourceful as Amazon.
It takes a lot of work, but when it's implemented correctly, dynamic pricing can appease your customers by offering optimized prices in accordance with your brand without killing your margins. With the help of data cleaning and price testing, retailers can grow to be as competitive as Amazon while turning impressive margins for your business.
Originally published Jan 8, 2016 4:15:00 PM, updated May 13 2020