Dynamic pricing is a strategy in eCommerce whereby the prices of products are adjusted in real time in relation to supply and demand in the market. Amazon, for example, updates their prices every ten minutes and sets the tone for how others in the industry craft their pricing strategies. Without dynamic pricing, merchants risk missing out on increased margins when competitors run out of certain products. On the other hand, a retailer could be missing out on revenue if they haven’t taken notice of a sudden drop in prices of particular items by their competitors.
Dynamic pricing is far more effective than price matching, where you essentially just match the prices of your competitors. This strategy is all about pricing intelligently; staying abreast of the latest stock levels and your competitor’s prices. It requires in-depth data to do it well, but it is still the way forward when it comes to pricing strategies for your eCommerce site.
The effectiveness of Dynamic Pricing
One of the key reasons dynamic pricing is so effective is that it is the result of keeping up to date with everything that is going on in the market. Through relevant software, you can adjust your prices based on inventory trends, and automatically incorporate those variables into your new schemes. Dynamic pricing helps you get rid of your inventory faster. Being aware of market trends, your own stock levels and what your competitors are doing means you can lower your prices and shift some stock without missing your revenue targets.
For example, dynamic pricing software will flag up when your competitors who have slashed their prices. On the other hand, perhaps you are selling your products with relative ease, but you are still failing to hit your revenue targets because your products are in fact priced too low; dynamic pricing software will let you know that you need to increase your prices to a competitive rate. It can also help you to determine whether or not your stock keeping units are scalable, to ensure long-term sustainability.
Not sure about Dynamic Pricing?
Despite dynamic pricing still being relevant and effective, many retailers have their reservations. Many worries that it is a strategy that can result in a race to the bottom, whereby sellers will become so influenced by the lowering of pricing that they are no longer hitting their revenue targets. This can be avoided by setting price guards so that no matter how low you go, your prices will never drop below a certain threshold. Retailers also worry that consumers will be put off by price surges.
There is always a feeling that a sudden increase in prices based on external variables, will lose a company sales and the loyalty of their customers, but they are used to flash sales and price hikes, so this really shouldn’t concern retailers too much. Despite the misconceptions, the fact that Amazon has been so successful whilst using this pricing strategy should be enough for retailers everywhere to give it a try. Don’t underestimate your customer’s abilities to adapt to the fluctuation in the world of online shopping.