In 2021, dynamic pricing made headlines when the prices of everyday goods such as toilet paper and hand sanitizer changed dramatically. More common examples are happy hours at your local bar, airline pricing on travel websites, and rideshare surge pricing.
Dynamic Pricing in a Nutshell
Dynamic pricing is a compelling strategy that can help brands run their business profitably while keeping up with the competition across channels. To put it in simple words, dynamic pricing is changing the discounts, or markdowns, on the price of products based on their KPIs. It is also called demand pricing, dynamic markdown, time-based pricing, or surge pricing based on its application in different markets.
One of the most common examples of this pricing strategy is the end-of-season sales. While off-season merchandise is sold at discounted prices, goods that are not affected by changing styles or weather can be sold at a constant price or minimal discounts.
Dynamic pricing strategy automates price adjustments based on data-driven algorithms fuelled by personalized information provided by each company. Factors like demand changes, inventory, and competitive data are also considered. To be successful, dynamic pricing needs to combine the age-old wisdom of the brand with machine learning and adaptable software.
Different Dynamic Pricing Strategies to Capture New Markets
Dynamic pricing strategy can appear in a few forms. Each of them can be used for achieving different goals.
- Segmented pricing: This strategy offers different prices for different customers. That means that the customers are divided into segments. For example, high-value customers can be offered higher prices. Here we can assume that they might put service speed and quality over the price.
- Time-based pricing: Companies can use this product pricing method when they want to charge more for providing some faster services. This means that you’re going to pay more if you want to have same-day service, or if you reach the company close to the end of the working hours.
- Changing market conditions: As you know, the market situation can change due to various factors. However, businesses must act accordingly. If sales begin to fall for some reason, the company will go for the strategy of lower prices.
- Peak pricing: Many industries can use this strategy to charge more during peaking hours.
- Penetration pricing: The penetration pricing strategy is used when businesses want to reach a large portion of the market. By doing so, future customers get familiar with the offered product. In order to do so, companies set prices that are below the market prices and tend to increase them gradually.
The Effect of Dynamic Pricing on Profitability
A dynamic pricing strategy isn’t new. The basic idea of adjusting pricing to match demand is as old as pricing itself. In fact, pricing used to be based on haggling. A fixed price seemed more “fair,” It was certainly less time-consuming for brands. Customers caught on to the idea and now expect fixed prices, especially in the retail market. But that’s changing.
Using a dynamic pricing algorithm enables brands to capture the most revenues from their products. It enables brands to optimize their pricing based on real-time inputs instead of setting a price over the long term and either pricing too low and giving up margin needlessly or charging too much and losing sales.
It also ensures that the customers who value a product the most have the opportunity to purchase it.
Why Do Other Pricing Strategies Often Fall Short?
If you refuse to be dynamic, you’re left with two basic pricing strategies. To achieve your desired profit margin, you can set a static price based on your variable costs or price.
These pricing strategies assume you will achieve the sales volume necessary for your desired profit margin to cover your fixed costs. You may find more brand manufacturers prefer a fixed-price strategy over a dynamic one. Most retailers, however, prefer fluctuating prices because they allow them to have more control over sales volume.
Fluctuating prices are basically what dynamic pricing used to be. You compile market data, process the data, and then adjust prices as needed. This process can take weeks, especially if done manually. Your customers are all charged the same price on the ground while you capture and analyze data. Prices are still dynamic, but they’re slow and rather unresponsive in a rapidly changing market.
In other words, these pricing strategies can fall short because your customers are more dynamic than you are. They shop around. They look for better prices, better products, and better choices. If you’re not responding, then you’re losing them to competitors who will.
How does Dynamic Pricing help Brands?
Though the primary advantage that may come to mind is increasing profit margins, there are several other benefits of implementing dynamic pricing. Let’s discuss.
Create demand to keep the stock health and age in check
At the right time, a rightly priced SKU can help boost sales. This helps in keeping in the freshness of stock and the availability of sizes/variants of a product. Products that are either discontinued, near expiry, or meant to last only for a specific period, need to revise selling price as per their planned lifecycle. If a brand is handling this manually across categories and points of sales, it can become near impossible to track and monitor. With the right dynamic markdown algorithm, prices can be tweaked to control the sales of a product.
Understand your customers
Collecting data is a key part of implementing automated dynamic pricing. This lets brands gain insights into the consumer’s behavior, patterns, and preferences. It can translate to more actionable data which can feed your algorithms to perform better, leading to an efficient pricing strategy.
Make informed decisions
Implementing dynamic pricing allows brands to access real-time pricing and demand trends. This can help make informed decisions on the price change of a particular product or category. Knowing the competition’s price trends ensures products are priced just right, which aids in increasing sales and profitability.
The digitally savvy consumer is often aware of changes in price as the demand for a product changes. Many a time, they are also willing to pay a premium to get exclusive access to a product. Similarly, it is known to them the prices of seasonal goods will change as the weather changes. Dynamic pricing lets you reflect the demand of a product at its price without compromising on the brand image.
Increase revenue and profits with a healthier working capital
One of the most significant outcomes of using dynamic pricing software is to take into consideration demand and supply, competitor strategies, and price fluctuation in the market. All of this data is crunched in real-time to deliver an optimum price for staying profitable. Dynamic pricing can be used to lower prices to increase sales, meet sales targets and avoid the accumulation of deadstock, thereby freeing up the choked revenue stream for the companies.
Although there may be a stigma around dynamic pricing, the reality is that it can maximize profits and track expenses. Using algorithms and machine learning, you’ll employ price optimization, ensuring you set your goods and services at the best price.
If supply and demand impact your product significantly, dynamic pricing may be the best strategy to ensure a steady flow of sales. What’s more, the data you gather after implementing dynamic pricing can reveal your products’ perceived value during times of atypical demand.
With insightful strategy and attention to detail, you’ll find that a dynamic pricing model can help take your business to the next level.