Did you know you could change the prices of your products with the time of day or even the weather?!

Well, it’s the best pricing strategy to use, that will maximize your profits considerably (by 25% on an average). It is called Dynamic Pricing. A research paper from Forrester shows that over 60% of all consumers are happy to pay a shifting price as long as they know how it was arrived at.

The most common example of dynamic pricing we see is on cab-hailing apps. The price of the service fluctuates with demand. A similar approach can work for products, but you need to be upfront about the changes you are making.

Read this blog to know how your business can make the best out of dynamic pricing.

What Is Dynamic Pricing?

It is a pricing strategy in which the prices of products are changed in response to the real-time demand and supply of consumers. American Airlines might not have expected this technique to become one of the most important strategies in business when they introduced it in the early ’80s. They altered the flight rates corresponding to various other factors, and this helped them improve their profit margins considerably.

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The best examples of success in business due to the application of dynamic pricing are big shots like Amazon and Walmart. Amazon updates its prices every 10 minutes. This model led to a 27.2% increase in revenues and it ended up becoming one of the top 10 retailers in the US for the first time in 2013. Walmart, the retail giant, changes its product prices almost 50,000 times a month. This led to a gross increase in its revenue by 30%.

Why Dynamic Pricing?

The owner of a clothing store says that he changes prices every 15 minutes so that he can stay at the top of Amazon ranking. He says, “changing prices more frequently has boosted sales dramatically, and noted that it (the price changing) requires a lot of attention.”

So, what lead to his sales to boost dramatically? These are the advantages that he got from dynamic pricing:

  • Applying this strategy gives you a better knowledge of the market trends and the real-time supply-demand of products. This helps you price your product accordingly.
  • When demand is low, the seller can drop prices and when demand is high, the prices can be increased. This will lead to profit maximization.
  • It will help to clear out slow-moving inventory. By reducing the prices of your slow-moving stock, you can expect to clear it at a higher pace.

What’s Included In A Dynamic Pricing Module?

According to a McKinsey & Company report, dynamic pricing happens in five modules or segments. Each of these modules represents a certain stage in the products life cycle.

The first stage is the launch phase where you set a price based on expected demand. This price is also determined by competing products in the market.

The second stage is where some data begins to come in about sales patterns. This module adjusts price based on real-world demand.

Modules three and four use consumer perception and competitor pricing respectively to continue to adjust your products price over time. The last module helps you coordinate these prices across all of your offline and online sales channels.

When Should You Implement Dynamic Pricing?

This is the most important question. Under what conditions should sellers alter prices of their products. Let’s take a look:

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Dynamic pricing can be implemented based on two parameters- the demographic in question and the demand. Based on which of these aspects is being considered, there are a few different ways to play your dynamic pricing model.

  • Competitor based pricing:

    Sellers should continuously monitor their competitors’ prices and adjust their own, so as to remain on the top rank in the marketplace. For instance, you can lower your price when you find that your competitor has raised his, for a faster sale.

  • Time-based pricing:

    Retailers, especially online retailers can change the price of products based on how customers purchase at different times of the day. For example, online customers tend to purchase more during office hours 9am-5pm, and hence, increasing prices during these hours will be a good idea.

Time based pricing also refers to altering prices of products depending on how long they have been in the market.

  • Peak pricing:

    This allows sellers to vary their prices according to demand fluctuations, i.e., increasing prices when demand is high or when competitors have low inventory. For instance, during holidays when consumers have a high demand for various products, prices can be increased.

Prices can also be raised in connection with some important event like when the ICC World T20 matches happen, fans would be keen on representing their country with shirts, caps, etc. So, this would be a good time to increase their prices.

  • Segmented pricing:

    Based on the geographical location and type of customers and their needs, prices of the same product can differ with areas. This kind of segmentation proves to be a wise move.

  • Penetration pricing:

    When you introduce a new product into the market, initially it is advisable to keep the price low, so as to drive the attention of customers towards your product. Later, when it starts to get popular, it can gradually be increased.

  • Bulk orders:

    Usually, when orders are made in bulk, it’s advisable to lower the price of each product, for the benefit of the customer.

  • Service-based pricing:

    Suppose the service required is urgent, then you can increase the price. You can also alter price based on time of the day, or during late hours of service, etc.

Disadvantages Of Dynamic Pricing

The most obvious disadvantage of dynamic pricing is how it might affect consumer perception. Imagine seeing a product for $20 at 5 PM on Tuesday, only to have the price bumped to $25 by 6 PM! One way to combat this is to reduce the variance in prices. Of course, clear communication helps. You can host ‘Happy Hours’ or other timed events where prices are usually low based on lower demand.

Here are some other issues you might face:

  • If the prices are lower at a competing retailer, consumers may permanently move away from you.
  • Dynamic pricing almost ensures that two customers get two different prices for the same product. This may cause unhappiness.
  • Different prices across offline and online channels can disrupt normal buying behavior and make one of your channels unprofitable.

However, all of these issues can be solved using clear communication. You can even make it exciting with hourly deals and offers as Amazon does.

How To Make Dynamic Pricing Work

Today’s e-commerce retailers can use technology quite efficiently in order to understand the behavior of each customer, by tracking his/her pattern of purchase over a period of time or demographic characteristics to make better decisions regarding pricing of the products.

After considering these criteria and setting new prices for your products, comes the exhausting task of repricing them. When manually done, you will have to spend at least 2 hours per day to reprise an average of 300 products. Here is where technology comes in handy. If you are a retailer who values your time, you should take the help of a software platform. This way, you can avoid the huge time consumption, the negligence, and errors caused by manual handling and also the cost of employing more than one person to deal with the same.

Primaseller can helo you update the prices of your products at different marketplaces from one single panel. This software eliminates the difficulty of you having to go to each marketplace differently to change the prices. Instead, changing them on Primaseller will automatically make the changes reflect at all the marketplaces you sell on.

Your time is extremely valuable. Spend it, only to grow your business in the right direction.

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