Dynamic pricing is a pricing strategy in which companies determine their sales prices of products or services according to current market demand.
In this article, we bring a detailed overview of the topic through the following chapters:
- What is Dynamic Pricing?
- Examples of Dynamic Pricing
- Benefits of Dynamic Pricinga in eCommerce
- Challenges in Dynamic Pricing
- 4 types of Dynamic Pricing in eCommerce
- How to implement it?
- Dynamic Pricing in Shape Core eCommerce
- We recommend: KLIKER market dynamic pricing module for eCommerce
What is Dynamic Pricing?
Dynamic pricing is literally selling the same product at different prices to different customers.
More specifically, it can be said that dynamic pricing is a pricing strategy in which companies determine their sales prices of products and/or services according to current market demand, and according to other external and internal factors. Prices are calculated by algorithms that include the prices of the competition, the availability of products/services in the market, current demand, customer behavior, and purchase history as input data.
Dynamic pricing is usual practice in B2B business where companies often create special offers and negotiate prices with each customer individually. In B2C sales, dynamic pricing has been used for a long time in certain industries such as tourism and travel (airline ticket sales, accommodation reservations, taxi transport, etc.).
In the last 5 years, retailers have started to increasingly accept dynamic pricing, especially in the online sales channel where the same can be fully automated.
Dynamic pricing can be done weekly, daily, every hour or even every few minutes.
Examples of Dynamic Pricing
Uber and similar apps
Probably the best-known example of dynamic pricing is Uber and similar companies that have made a revolution in the taxi market in the last decade. Apps like Uber adjust the price of a ride to current demand (how many users are currently looking for a ride) and supply (how many drivers are currently available).
Surge pricing in Uber, Source: Uber
If you’ve ever bought a plane ticket online, you may have noticed that after searching the same routes several times, airplane ticket prices start to rise. Suddenly the same ticket costs a bit more than yesterday or a couple of hours ago. The same applies after the date and place of the concert of a popular performer or an attractive match of the national team is announced. The airline industry has been using dynamic pricing since the 1980s when it was started by American Airlines (you can read a very good article on the subject here), while today it is used by most of the world's major airlines such as Etihad, Lufthansa, Air China or Emirates.
Research and scientific papers are being done on the topic of dynamic pricing in the aviation industry, and the effect that dynamic pricing has brought is so positive that numerous strategies have been developed, and within airlines there are entire departments that deal only with this issue.
Retail and online merchants
When it comes to retail, the leaders in dynamic pricing are big retailers like Amazon, Walmart and Target who have brought dynamic pricing into our daily lives by applying it to groceries and other household necessities. As one of the world’s largest retailers, Amazon has fully implemented dynamic pricing that calculates and updates prices every few minutes!
Zalando and other fashion platforms also use dynamic pricing in ecommerce to achieve the best possible sales results and maximize profits on an existing customer base.
Industries in which the use of dynamic pricing is growing the most are Fashion, Health & Beauty, Home & Garden and Food.
Benefits of Dynamic Pricing in eCommerce
Merchants who use dynamic pricing on their webshops do so for several very good reasons:
Dynamic pricing is based on current changes in the availability and demand of a product or service. It takes into account market price fluctuations, competition activities, even the supply and demand of an individual product. The goal is to set optimal prices at a given time and increase profitability despite price changes.
How exactly do we save money and thus increase profitability?
- If the demand for a product on the market is higher, we can sell it at a slightly higher price and achieve a higher margin.
- If the demand for a product has decreased, and we have it in stock, by selling it at a lower price we will sell it sooner and thus free up funds that would otherwise be tied in terms of stocks of goods that are not sold. In the long run and on a large number of items this can significantly affect the profitability and business of the company.
- There is no need for manual calculation of prices, nor for administrative tasks related to their change. Because all calculations are done in web-based software or a special application, companies save working hours and therefore money, and at the same time reduce additional employee costs. All this contributes to increasing profitability.
In addition, having the right price for the right customer at the moment he makes the purchase decision means a higher conversion rate, more customers, and again - ultimately higher profits.
This is the first and most important reason why more and more online retailers are implementing dynamic pricing or at least thinking seriously about it.
Better price control
While the opposite might be heard or read in some places, it is actually true that dynamic pricing brings greater control on pricing. Merchants using dynamic pricing:
- have a constant overview of price trends in their industry,
- closely monitor the price positioning of competition and
- over time they gain a better understanding of the supply and demand of certain products.
All of the above helps retailers define the right prices of products and services at the right time and consequently maximize revenue and profit.
Flexibility and brand value
Fear of the potential damage that price changes can cause to brand values and user experience is often named as one of the main obstacles to the introduction of dynamic pricing. Consumers unfamiliar with this way of defining prices could interpret different prices for the same product as manipulation or fraud. This is certainly a topic to pay attention to, but with a good approach, the negative consequences can be completely avoided or minimized.
So - if dynamic pricing is set well, it can even protect and further strengthen the brand strength and the promise we communicate to customers through the brand (e.g. fastest, best, highest quality, personalized, unique, premium ...). The pricing algorithm should always set a minimum or maximum price that actually reflects the brand value (e.g. a minimum price for premium products - you may be able to lower it, but that would not be good for the brand; a maximum price for a budget or best- buy products). Webshops can use dynamic pricing to launch seasonal and promotional offers while remaining profitable.
Partial or full automation of dynamic pricing
The only way to achieve quality management of hundreds and thousands of products is automation.
Dynamic pricing in eCommerce can be fully automated (both calculations and pricing), or partially automated, in which case prices are calculated automatically, but must be verified by the administrator to set and become visible to customers. Each company and industry has its own specifics and differences, so it is great that dynamic pricing can be largely customized to the client.
Wondering how we can list mistakes as advantages? Sometimes that is also possible.
As is the case with any man-made algorithm, a dynamic pricing algorithm can lead to errors. This is often the only and best way to learn how to set up dynamic pricing even better and more efficiently. The experiences of large companies such as Amazon, Best Buy or Walmart show that potential errors in fully automated dynamic pricing systems do not have a significant impact on overall profits, as price changes are so frequent that only a limited number of customers can get the wrong price.
There are even specialized error-rate websites on the Internet that summarize error-priced airline tickets and the similar services. Isn’t that even a good way to get new website visitors, potential new customers?
Challenges in Dynamic Pricing
Customers understand and accept that prices change, but they want to know how and understand why. That's why seasonal and weekend discounts are OK, but dynamic price changes sometimes lead to resentment. If a customer comes to the store on Monday, they will buy a t-shirt at a 20% higher price than yesterday (because yesterday was a weekend discount). But if he notices that the price on the webshop changes during the day, or that it differs online and in the physical store of the trader, dissatisfaction could arise.
Although dynamic pricing can be set so that customers save when buying, it is often used in the opposite sense - for the purpose of increasing the profit margins of the merchant. This leads customers to feel that they have overpaid for something, and if they realize that someone else has paid the same thing less, they might be disappointed, give up the purchase, or even stop trusting that brand.
How to deal with it? Communication and transparency are the keys!
It is necessary to clearly state in Terms & Conditions that prices are dynamically calculated and determined. It is advisable to use the same in marketing communication (for example, Hurry up and choose your model because prices could change!, Special price just for you, do not miss it!). If the customer asks a customer support question on this topic, the answer should be clear and informative. Customers will gradually get used to price changes and adjust their buying habits accordingly - when they see something they like, they will buy immediately, without delaying the purchase.
Are you aware of the ROBO phenomenon: Research online, Buy offline? This is very common today, and it happens even while customers are in a physical store. There is a possibility that the customer, while in the store and researching online, will encounter a situation that the product on the webshop is cheaper than in the store of the same retailer. This can encourage him to look for the product in another store or to leave the current store without buying.
Part of the missed sale can be prevented by communication at the points of sale where customers are invited and encouraged to buy online, for example: Buy online, you will find some products at a better price!
Let's not forget that when buying any product or service, a certain need is met - if at that moment the customer really has a need for that product, he will buy it despite the better price online.
Gaming the System
Another example is the parallel opening of several applications that offer the same service (e.g. taxi transport) whose algorithms recognize this and offer the user a lower price for the same route when returning to the application within 30 seconds or few minutes. Research has shown that users often go out and re-enter the application to see what the price of transportation is with the competition, so they decided to offer them better conditions if they return.
It may happen that two companies both use dynamic pricing based on competitive prices. They both want to be cheaper than the others. This process continues until one company reaches a point where it is no longer profitable, that is, it can no longer lower prices. This scenario should be avoided in any case since no one benefits from it, not even customers in the long run.
Types of Dynamic Pricing in eCommerce
The perceived value of the product may be different for different customer segments (for example, by geographical regions). The most plastic example is the jacket in the polar regions vs. tropical areas. Or a fishing hook in the coastal area vs. desert area. Therefore, the dynamic pricing algorithm takes into account the customer's location and defines the adjusted product price based on it.
Segmented pricing is sometimes called discriminatory, but let’s think for a moment. If you want to drink coffee in the main town square, you will pay a lot more for it than in a local cafe. If you buy groceries in a store on an island in a tourist country, you will pay 10-20% more than on the mainland, regardless of whether it is the same retail chain. We can conclude that dynamic pricing is just a way for online retailers to achieve the same on their webshops.
Time-based pricing means using time periods to define prices that are higher or lower than usual. It is often used in transportation, such as the aforementioned Uber, Bolt, or the like. It is also used in food delivery where the price of prepared food like sushi falls in the evening with the aim of selling the remaining quantities.
Peak pricing means that prices are higher during the season in which the product is in high demand. It can be applied, for example, to accommodation during the holidays, to Christmas lights before the holidays, or to bathing suits during summer. Dynamic pricing for such categories can be automated based on the number of searches or website visitors - as the number of visitors (or demand) grows, so do prices.
When entering a new market, retailers may temporarily offer lower prices than the competition in order to position themselves, achieve brand awareness and brand preference among customers.
How can this be dynamic? For example, a rule can be set that each customer gets a 30% discount, but only for the first purchase or the first few. After that, prices return to standard values.
Competitor price tracking
This is the most popular type in mainstream market. It is based on tracking (scraping) web sites of competitors and adjusting price base on simple rules (for example 3% lower than competitor XY). This kind of price adjustment can be risky for margin, but usually software's for this type of Dynamic pricing have margin protection (like min allowed margin).
This is simple option to implement but also very limited. Biggest limitation is that this king of Dynamic pricing does not take in to consideration other important inputs like: offer and demand, customer behavior, SEO and quality of landing page (in ecommerce)
AI and machine learning in Dynamic pricing
We believe that in upcoming years Dynamic pricing in ecommerce will become must have toll for every ecommerce. Companies without it will be in huge disadvantage. Managing prices manually is time consuming and time = money.
With adoption of AI and machine learning all Types of Dynamic pricing mentioned in this post will be included in modern tools for Dynamic pricing. All mentioned models and types have some valuable inputs for AI models. Incorporating them and finding optimal ratio between them is biggest challenge but only real life testing and constant optimization will give us best sale out/margin ration.
How to implement Dynamic Pricing in eCommerce?
Now that we have learned what dynamic pricing is, what are the advantages and challenges and what are the most common types, the question arises - how to implement it?
To implement dynamic pricing in eCommerce we need 3 things:
- dynamic pricing strategy - define an overall strategy, for each product category or brand on offer
- dynamic pricing software - for calculating dynamic prices; third (external) software or as part of the eCommerce platform on which the webshop is set up
- source of input data - software for analytics and collection of market data, price comparison, and competition monitoring
How are prices set in eCommerce systems?
When building an eCommerce website, the eCommerce system on which the website runs is usually integrated with the company's business system (ERP), in which all product data is stored and processed, including product names, technical specifications, purchase prices, sales prices, stock status, sales data and more. Integration generally means that sales prices defined in ERP are pulled into the eCommerce system and displayed on the website. Every time prices change in ERP, they change on the website as well.
Implementing Dynamic Pricing in eCommerce
In this scenario, there are three points where dynamic price calculation can be implemented:
- in ERP (like SAP's dynamic pricing software)
- external dynamic pricing software that comes 'between' ERP and eCommerce systems and is connected to both
- in the eCommerce system (like in our Shape Core eCommerce system)
In all three cases, the dynamic pricing software needs inputs - data that will be used as parameters in the set algorithm and that will directly affect the calculation of sales prices.
Input data and algorithm examples
Input data can be:
- internal sell-out data (example of dynamic pricing rule: reduce the price by x% if the daily sell-out falls below 10 pieces);
- availability of goods on supplier's stock (increase the price by x% if the supplier's stock is below Y pieces),
- user data - geographic, demographic, behavioral (increase or decrease the price x% if the user visited the site more than 5 times in the last week) and
- market data in terms of competition analysis and price comparison (reduce the price so that I am among the 3 most favorable sellers in the market).
Dynamic Pricing in Shape Core eCommerce
A new DYNAMIC PRICING MODULE is now available for eCommerce websites on the Shape Core platform. You can set up a Dynamic Pricing Algorithm that will dynamically determine the selling prices of items.
The module for dynamic pricing was developed on the Shape Core platform itself, so the setup is significantly easier compared to the integration with third-party dynamic pricing software.
The price calculation model, meaning the algorithm itself, is adapted to the industry and customer requirements. By jointly analyzing the possibilities that this module offers on the one hand, and business needs on the other, we come to the best possible algorithm. By tracking the results over time, the algorithm is adjusted and optimized to make achieve even better sales results with an emphasis on profitability.
The prices calculated by the dynamic pricing system can be displayed on the website automatically or with the approval of the eCommerce administrator, so the merchant has complete control over his prices. Likewise, the frequency of calculations and price changes is set at the request of the merchant.
We recommend: KLIKER market dynamic pricing module for eCommerce
What is Kliker?
KLIKER is a web-based market intelligence tool that is providing real-time view of the market on a single screen.
My market screen in KLIKER market app
KLIKER is an advanced software solution that gathers market data for online offers and serves them:
- through My Market screen that serves as an advanced search engine - products can be searched and sorted by numerous features that adapt to each product category, and there can be more than 30 (depending on the category)
- through Dashboad, which shows market trends through graphical representations of the most important KPIs
- through the Alerts display that lists all the latest changes in the market in terms of newly listed products, changes in prices or stock levels, and can also be searched by retailer or product brand
- through the API - by connecting via the API, the data from KLIKER can be used for further calculations and analyzes.
The last option (API) and the increased demand for dynamic pricing tools in the recent period have motivated the creators of Kliker to create KLIKER dynamic pricing module for eCommerce, which serves market data as inputs for calculating dynamic prices.
After connecting via the API, the data is directly downloaded from Kliker into dynamic pricing software, but it is also possible to search and analyze it through the Kliker application itself, as well as export to Excel. The data is updated several times a day, depending on the product category, and it is possible to refresh at the request.
For each product (each SKU with a unique code like EAN code) it is possible to obtain a complete set of data that includes:
- the number of retailers that currently offer the product
- the lowest selling price on the market
- the retailer with the lowest selling price
- average selling price
- own current market position
- stock data
- data on product availability for every retailer (available / out of stock)
By combining market data obtained through Kliker with own weekly sell-out data (see example in the image above), the eCommerce team can create a great base for a dynamic pricing system.
Kliker is a web-based SaaS application, which means that it is accessed by logging in through a browser, without any installation or setup, with a monthly subscription that depends on the number of product categories and the number of markets in scope.
For more information about Kliker, feel free to contact us, we will be happy to connect you with the Kliker team.
Dynamic pricing is the future of eCommerce!
- In this growing sales channel, the competition is bigger and bigger and every trick to increase profitability is quickly accepted and implemented.
- Dynamic pricing is based on software that dynamically calculates product prices based on input data, which can come from several sources - from its own ERP, from zero- and first-party data on webshop visitors and from external sources such as the Kliker application, which collects and processes market data.
- Shipshape offers dynamic pricing as an option for all merchants who have a webshop on the Shape Core platform.
- The algorithm and all rules for calculating prices are defined at the request of the merchant, who retains full control over prices since the system can be fully automated or partially automated (the system calculates but the administrator approves the prices).