Dynamic pricing is when a company or store continuously adjusts its prices throughout the day. The goal of these price changes is two fold: on one hand, companies want to optimize for margins, and on the other they want to increase their chances of sales.
Dynamic pricing is a pricing strategy that applies variable prices instead of fixed prices. Instead of deciding on a set price for a season, retailers can update their prices multiple times per day to capitalize on the ever-changing market. Dynamic pricing often gets confused with personalized pricing. But these two different types of pricing are extremely different from one another.
To put it simply, dynamic pricing looks at your products and and their relative value in relation to the rest of the market. Personalized pricing, on the other hand, looks at individual consumer behaviors and gauges (and changes) a product’s value based on past shopping experience.
Personalized pricing is controversial because it uses individual data and shopping experiences information that many consumers consider private and personal. It’s also somewhat risky in an age where consumers can interact with and talk to each other like never before. If Consumer A finds out they paid more for the exact same product than their best friend, their trust in a company will erode.
Dynamic pricing, on the other hand, allows you to capture extra sales and take advantage of a changing market without invading consumer privacy or trust.
Dynamic pricing and e-commerce co-evolved together. As the internet became more sophisticated and online shopping grew, so has the need for dynamic pricing.
Consumer electronics was one of the forerunners in the retail landscape in terms of the trend towards online. As a category of elastic products that are sensitive to price changes, it makes sense. Retailers need dynamic pricing to stay on top of the market and continue to offer competitive prices.
But as consumer spending rises in this category (and with it the online market share), two developments that affect dynamic pricing have emerged:
Increased price transparency: As more people shop for consumer electronics online, the amount of comparison shopping also increased. Consumers are now far more likely to evaluate a retailer’s prices against the company’s competition.
This shines a spotlight on your product price and makes it the most important part of each sale. Since consumer electronics are typically highly elastic, a 5%-10% difference between your price and your competitors could be the deciding factor for a consumer.
More frequent price changes: Because of this increased demand for price transparency and matching, the number of prices changes every day has increased dramatically since the dawn of e-commerce. Traditionally, the supplier or the manufacturer would determine the price of a product with a consumer advised price (CAP). However, this CAP quickly became irrelevant with the growth of comparison shopping online.
Today, prices are determined by the retailer instead of a supplier, and are based on a variety of variables, including general market trends, competition prices, and stock levels.
A variety of other categories, such as Toys and Games, for example, follow the same pattern: when online spending rises, so does the demand for price transparency. This, in turn, leads to an increased frequency of price changes and the use of dynamic prices.
This trend often also attracts new players on the market without physical stores, which makes it difficult for traditional retailers.
Although the traditional retailers have the first mover advantage, they are generally less flexible in adapting their (pricing) strategy. However, the retailers that do capitalize on their omnichannel advantage can move ahead of the pack.
Most retailers practice a most basic form of dynamic pricing by discounting items at the end of a season or using a clearance sale to get rid of extra stock.
However, dynamic pricing can go much further than a discount at the end of a season. When you use a dynamic pricing software, you can wield the power of data to capture more sales and take control of your assortment.
Today, almost all major retailers will use some sort of dynamic pricing software.
Dynamic pricing has obvious benefits online: you can follow the competition, adjust prices instantly, and easily capture quantitative metrics about your store to improve your performance.
Dynamic Pricing is also useful offline. Through the use of electronic shelf labels (ESLs), you can easily apply dynamic pricing practices to your physical store. This helps you keep your prices up-to-date with what you present online, and makes pricing management easier.
Traditionally, there are three basic ways retailers set their prices: the cost-plus method, the competitor-based method, and the value based method.
The cost-plus method is the most simple out of all three. All you need to do is take the cost of your product and add the desired margin on top of that cost. The main advantage of cost-plus pricing is that it’s easy to understand and implement. However, its main disadvantage is that it only considers internal factors, ignoring external market conditions.
To determine the margin or 'markup' percentage, use this simple formula: subtract the product's cost from its selling price, then divide that difference by the cost. Finally, multiply the result by 100 to get the markup percentage.
The competitor-based method follows your competition. If your competitor changes their price, you’ll change your price as a result, whether that’s to be lower or higher than your competition.
The main advantage of this pricing approach is that it considers external factors like competitor pricing. However, its downside is that it assumes competitors have accurately set their prices.
The value-based pricing method follows the price elasticity of a product. Different consumers value items differently, so everyone has a certain threshold that they are willing to pay for a product. A value-based pricing method capitalizes on the public’s perception of the value of a product and charge accordingly.
The main advantage of this pricing method is that it integrates both external and internal data, providing a balanced approach. However, its main drawback is its complexity, making it the most difficult pricing method to implement.
Dynamic pricing software allows you to combine different pricing methods at the same time. Some softwares also allow you to incorporate other useful information, such as your stock levels, popularity score, and even the weather forecast.
Implementing dynamic pricing is a journey, one that has a lot of twists and turns. And it does create a big change in your organization. That’s why you should view the adoption of dynamic pricing as an opportunity to improve your overall pricing strategy and internal systems, as well as your overall margin.
After hundreds of implementation projects, we’ve come up with a five-step process to successfully implement dynamic pricing:
Define your commercial objective: Your commercial objective is like your company’s compass: it’ll help you navigate any institutional changes and keep you heading in the right direction. The commercial objective applies to more than just pricing and marketing, but it’s the first step for a successful dynamic pricing strategy. Learn more about how to define your commercial objective here.
Build a pricing strategy: Your pricing strategy takes your commercial objective, then translates it into strategy that your team will use to sell products. An example? Say your overall commercial objective is to be known as the cheapest retailer on the market. Your pricing strategy would then be to make sure every product in your store is cheaper than the competition’s offering.
To develop an effective pricing strategy, follow a three-step approach. Learn how to build a pricing strategy here:
Assess Your Place in the Market
Start by evaluating your current pricing model—this is known as the "As-Is Situation." Gather stakeholders to review your existing approach and answer key questions: What is your current pricing model, and what are its strengths and weaknesses? Are you a market leader or a challenger? Is your focus on maximizing sales volume or overall profitability? This reflection helps you understand where you stand before making any changes.
Build Your Pricing Strategy Framework
Next, engage stakeholders in solution sessions to establish a shared understanding of the As-Is analysis. Many assume this step is unnecessary, but it's crucial to ensure everyone is on the same page about existing pricing strategies. Use these sessions to review findings and create a draft framework. This involves leveraging expertise from sales, segment managers, and pricing specialists to craft a strategy that aligns with your business goals and customer needs.
Set Business Rules for the Future
With a clear framework in place, the next step is defining the "To-Be Situation"—how you want your pricing to function going forward. Establish the levers and rules that will guide your pricing and calibrate them based on your analysis. After aligning internally, begin testing and iterating these rules using tools like Omnia to see what adjustments yield the best results.
Choose your pricing method(s): Your pricing strategy tells you what you want to do. Your methods are how you’ll achieve those pricing goals. Your pricing methods are more specific than your pricing strategy.
Establish pricing rules: Pricing rules tell your dynamic pricing software what to do. You should set a rule for every product that the software needs to track and change.
Test and monitor: The final step for getting started with dynamic pricing is to test and monitor your software’s changes. Learn more about testing the effectiveness of your online pricing.
Read more about interesting pricing strategies here: