How Dynamic Pricing is Disrupting Online Retail in 2017

With the era of online shopping came the concept of dynamic pricing. This is a natural turn of events that might not be working as well as expected.

Dynamic pricing is a strategy based on which retailers change the price of the product based on supply and demand.

In order to do this, you need a large amount of information. This includes the initial conditions and the prices that competitors are charging. In addition to that, customer information is also a vital input. Customer price perception also plays an important role since that’s what determines the profit margin that you’re getting.

In the old days, static prices were the norm, since there wasn’t much to be done when it came to doing research on how much a competitor priced their products and how you had to compete. But that’s changed now. The old strategy didn’t help retailers make profits. But today, with dynamic pricing, you can find that the profitability has been optimized to everything, even simple products like medicine and sports goods.

It’s Always Been Around

The idea of dynamic pricing isn’t new to the retail industry. It’s been something that organizations have done for a long time. It’s a tactic used to grab the customer’s attention and so far, it’s proven to be extremely successful.

Here’s a few examples on how dynamic pricing has influenced different economies.

  • The concept of “Happy hours” in a bar worked in attracting customers when they weren’t expected at all. Of course, the prices on drinks were slashed, but this attracted a lot of customers, which increased the amount of business that the establishment did during that time. This increased their profits for that time. It proved to be so effective that most bars and pubs adopted it as well.
  • The stock market operates on the basis of share values rising and falling. Similar to the concept of dynamic pricing, the value of shares are calculated by considering initial conditions, demand, and a few other parameters. This includes the company’s actions and the state of the economy. So, the prices are adjusted to make the most of the current situation.
  • Take airline ticket prices, you can see that they operate along the same line. During the weekends and Fridays, you’ll see that prices are higher than on regular weekdays, since they know that more people are inclined to travel during those times.

It seems natural to make profits by controlling prices based on demand. However subtle, the same ideology has been followed across several business streams.

What’s Changed Now?

Dynamic pricing is only possible when you have all data on hand. Another important aspect is running the data using a custom algorithm that suits your particular business model. You’ll find quantifiable results only when you take all variables into account and bring out accurate pricing.

You might be wondering. If all this was thought of and implemented all along, what took online retailers so long?

Factors that made dynamic pricing possible are computers and new technologies that recently came into existence. The concept of collecting, storing, and analyzing data paved the way to bigger things, dynamic pricing being one of them.

Retailers Hesitation

The algorithms in place are fed with all the available data on hand. These are details that concern the product and customers. The resultant price will determine the profit or loss that is collected on the product.

A foolproof algorithm can give you accurate answers. However, not all retailers are using these results. You have to understand that changing prices like this is a huge risk to take as well, and that’s something not everyone is comfortable with. A slight drop or rise in the cost of the product will affect the economy and the possibility of success.

This algorithm is simply used by the retailers. Why they hesitate is because they don’t understand how it works. That’s the case even after competitor’s prices are taken into account. That’s why not every retailer takes dynamic pricing into account.

Amazon’s success

Amazon has had tremendous success in applying dynamic pricing to their products. Other retailers are still attempting to beat Amazon in this field. This is the single reason Amazon is doing better than their competition. They’ve managed to price their commodities lower than others.

Dynamic pricing, coupled with their good user interface and customer services, Amazon has managed to stand at the top. This was only possible with proper synchronization of e-commerce, omnichannel, and brick and mortar stores.

It takes Amazon two minutes to make a price change ! Is your price right?

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Implementation

Dynamic pricing is a five stage module. It needs to be gradual so you don’t lose money. These are stages where the price of the commodity is decided based on different factors.

  1. The first module is the long-tail module. It is the price that is determined at the launch of the product. It plays a crucial role in the success or the failure of the product. Essentially, the price is based on base price, price of similar commodities, and set profit margins. The success depends on the product itself and its reach, done through marketing.
  2. The second stage is where the price is increased or decreased based on demand. Both can affect profits negatively or positively. By reducing price, there may be ultimately more buyers. At the same time, if received well, consumers may be prepared to pay more for the same product.
  3. The third stage is key value identity module. This depends on the consumer’s price perception. This largely influences sales. Here, a product will sell from the retailer if the prices are below competitor’s prices. This is the stage where a customer is either gained or lost. The KVI and the price need to be on the mark.
  4. Competitive response module is the fourth stage. Here, price adjustments are done based on the pricing scheme of competitors. By selling at a price lower than competitors, you increase the chances that the customer will buy from you.
  5. Omnichannel Module is where thorough analysis should be done in all channels that you’re doing business in. This is the fifth stage where coordination is done across all online and offline channels. It helps normalize the price and keep dynamic pricing at a feasible value.

How To Find The Key Value Items(KVI)

Key value items are the top sellers. These are commodities that retailers can be sure the consumers will buy. The profit margin is generally based on these KVI’s. It isn’t as simple to fix KVI’s either. However, considering the wide range of products, even though 80% of the revenue is based on KVI’s, the profit it brings only chalks up to 50%. This disparity is the first sign that the dynamic pricing isn’t working to the favor of retailers.

Slashed prices will generate more customers, since that’s obviously something that benefits them.

How Customers Make A Decision

When a person finds a product on sale, that’s something that tells them that they should be ready to make a purchase. The person must have previously browsed through several products. This information is collected and dynamic pricing is applied on other similar products. This is the result of the algorithms and dynamic pricing.

When the customer finds the desired product at a discounted price, it’s natural for them to make a purchase. This naturally increases the sales that you generate.

Issues With Dynamic Pricing

Although dynamic pricing is useful, there are some issues that you should be aware of regarding its usage.

  • With the same products available at two different prices, a majority of customers will migrate to the store where the price is lower. Thus, the winning party will increase their sales. This leaves an imbalance in the market. This will go on until the next best price comes along.
  • A split economy where two different prices exist isn’t going to see any growth unless it’s uniform.
  • A system that’s dynamic can result in discrimination. You can’t have two prices on a single commodity for two different customers. But that’s ultimately the case here.
  • The focus on KVI will leave other commodities at a disadvantage. With the decrease in demand for non-KVI products, the customer will be benefitted. However, the retailers will experience a loss.
  • Similarly, retailers who have goods at higher prices in physical stores and lower in online stores also run a risk, since that persuades customers to buy from the online store and not the physical.

With the race in being the most successful e-commerce venture, dynamic pricing and slashed prices may not work in the favor of the retailers or in the overall economic growth. That’s why it’s important to ensure that you’re doing dynamic pricing only where it’s required.
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How to Use a Dynamic Pricing Strategy for Your Shopify Store

If you have a Shopify store, then you likely already know that the market is forever changing, especially in the online marketplace. Therefore, to keep your sales at their highest, your pricing strategies have to change along with the prevailing market conditions. Dynamic pricing strategies will allow your store to be at the forefront, and still make profits, no matter the conditions of the market at that time.

Not a lot of people know how to use dynamic pricing strategies for their Shopify stores, however, and this can lead to a bit of confusion in how to see returns on their investments. In an effort to take that away confusion, let’s break down dynamic pricing strategies, so you can learn how to use them in your Shopify store successfully.

Dynamic pricing basics

In dynamic pricing, a price is never firmly set. Instead, it is constantly changing to suit the current market conditions. It is similar to the law of supply and demand in that when the demand is up the prices go up, and when supply is up the prices go down.

The difference between supply and demand and dynamic pricing is that dynamic pricing relies on more than just whether or not the customer wants the product. In this case, the customers already want the products but the amount of profit you make depends on more than just demand.

Time the purchase is made

Knowing what time of year your products are in the most demand is the first factor to consider in your pricing strategy. In the season of highest demand, your price will go up to maximize profit. Typically buyers will pay more for products at certain times of the year. For example, during the holidays. It’s not uncommon for consumers to pay above average for products to get that perfect gift for their loved ones. Conversely, if your store specializes in football accessories, odds are your sales will not be going up during basketball season.

Time it takes for you to deliver

When consumers pay more for a product, they expect fast delivery. If your Shopify store delivers items quickly, then it stands to reason that you can get away with charging a higher price. The cost of convenience generally justifies the higher price. However, if you take longer than the expected delivery time, your customers could be left feeling duped by your higher price and next time may go to your competitor.

Targeting of particular groups

This is one element of dynamic pricing strategies that has been seen as controversial to some, and that is because some groups will be given different rates than others. The idea is that the standard of living is higher in some parts of the country, so charging more for those products won’t be as big of a deal. In lower standard of living areas, the prices will be lower so that they can still purchase the product, but your store can still make a profit. It’s important to note that the key here is not to change pricing solely based on race, gender, or sexual orientation. Although difficult to prove, you don’t want to open your online store up to that kind of scrutiny.

Peak user pricing

Similar to time of year pricing, if the demand is high, the price can go up. The difference here, however, is the sudden surge may have nothing to do with the time of year. For example, if you have a product in your Shopify store that Kim Kardashian happens to promote randomly on Instagram, you could see a spike in sales. During this peak time you can maximize your profits by adjusting your price.

Quantity of goods being purchased

If there is a customer that buys your products in bulk, or they are always there to buy from you, then it is good idea to make an exception for this customer, and reduce the price for them. It may be risky for first time bulk buyers, as they may not be a return customer. On the other hand, they could become exceptionally loyal allowing you to not only recover quickly from the discount, but make a higher profit overall.

Hint: You can utilize technology from software like IntelligenceNode’s Incompetitor to analyze these price peaks in real time and adjust, automatically.

Pricing your store

These are just a few of the factors you can use in your dynamic pricing strategy in your Shopify store. Be flexible, keep an eye on demands, and be sure not to focus solely on exploitation of customers. By pricing your goods based on the market conditions, your store should be able to make a consistent profit all year long.

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