Setting a price for any product is just as important as marketing, and even the product itself. Price the product too high and not enough people will buy it. Price it too low and you’re missing out on profits, while also running the risk of devaluing your brand.
Numerous pricing models have been developed to help maximize sales and profits, one of which is dynamic pricing.
What is Dynamic Pricing?
Dynamic pricing means that the price of a product will change according to changes in market demand and other criteria. Calculating the optimal price can be complex, but software is available that can take into account numerous factors and make the calculation seamless. Prices can also be updated automatically, even second by second, to help companies keep up with changes in market conditions as they happen. With prices generated for the right customer at the right time and in the right market conditions, more sales are made and profits are increased.
Why is Dynamic Pricing Important?
Dynamic pricing is important because market conditions are always shifting. Even in the course of a single day, conditions can ebb and flow as consumer’s shopping habits change and other factors come into play. Changing prices in line with these swings in market conditions help to keep businesses as competitive as possible.
Examples of Dynamic Pricing Strategies
Dynamic pricing strategies can be based on a range of criteria that affect the optimal price of a product. Some of the strategies include:
• Time-Based Dynamic Pricing
Shopping habits can change throughout the course of a day. For online stores, for example, peak demand tends to be between 9 am and 5 pm when people are in the office. Other businesses might find demand is at its highest on Saturday afternoons when more people are on the high street or hitting the mall. Adjusting prices in line with demand at that time of the day will help generate more sales and increase profits.
• Segment-Based Dynamic Pricing
Segment-based pricing means offering the same product at different prices at any one time. Factors that decide how the different prices are determined include location and potential customers’ needs and income brackets. Another term for segment-based marketing is ‘price discrimination’
• Market-Based Dynamic Pricing
Market-based pricing adjusts prices according to market conditions such as how much demand there is for a particular product at that time. A store that sells cold refreshments, for example, might raise its prices on a hot day because they know people are more likely to pay higher prices. Shortages of certain products are another example of when market-based pricing is employed.
What are the Benefits?
Dynamic pricing offers a variety of benefits to businesses implementing the model. Some of these benefits include:
• Boost Sales (& Maximize Profits)
Dynamic pricing helps to generate more sales than a business would otherwise see – thus generating more revenue. In addition, more profit can be made per item when the conditions are right, thus maximizing profits overall.
• Provide Valuable Insights Into Customer Behaviour
Making any changes to pricing strategies can provide something that’s very valuable to marketing and sales teams: feedback. Reactions to price changes can help to shape future marketing/sales strategies, helping to maximize sales and profits further. For example, if a product in a certain region sells well after a price change, an insight is gained into what people in that region are willing to pay.
• Create Demand
When demand is low, relatively few products will be sold. Dynamic pricing, however, enables companies to create demand, helping them to generate more revenue from their products.
• Allow Pricing to Reflect Demand
Dynamic pricing can take into account how much demand there is for a product at any one given time. Adjusting prices accordingly helps maintain the optimal balance between the number of products sold and the profit per product.
Dynamic Pricing Challenges
While dynamic pricing has some clear benefits, it is not without its challenges. Some of these challenges include:
• Customer Satisfaction and Retention
Dynamic pricing runs the risk of alienating some customers if they are paying more for the same product than other people are. Alienation can reduce customer satisfaction and might even lead to some customers being lost to competitors.
• Data Acquisition and Utility
Acquiring data that can be used to make decisions can be time-consuming and expensive. In some cases, not all of the information that’s acquired will be useful. It might also be the case that very large databases are needed for algorithms to be able to generate accurate pricing. Data might also be required spanning different seasons and other factors that determine the optimal price.
• Data Accuracy and Errors
There’s also a risk of inaccurate data that can lead to errors in pricing. Mistakes in pricing can have a negative impact on sales and revenue in the short term, while it might also affect a brand’s reputation in the longer term.
Your competitors are also likely to be doing what they can to encourage people to buy their products instead of yours. When competitors are trying to out-price each other, it runs the risk of starting a price war with prices continually being forced down. The result can be very slim profit margins.
How to Implement and Optimize a Dynamic Pricing Strategy
A dynamic pricing strategy will be easier to implement and more effective if you use software that’s designed for the task. The right software will be able to process the data you have with relative ease, and leverage the insights within to generate optimal pricing strategies.
For example, software such as Vendavo Pricepoint collates relevant pricing information from throughout a business into a single place. With Deal Price Optimizer, it’s possible to integrate directly with your Customer Relationship Management (CRM) platform and deliver optimal pricing intelligence using AI.