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What Is Dynamic Pricing, and How Does It Affect E-commerce?

Jawad Khan

Dynamic pricing is one of the trends that has taken the e-commerce industry by storm. Find out why it's important for your business.

While it is not an entirely new concept and companies have been using it randomly over the years, dynamic pricing is much more relevant in the new age of e-commerce companies.

Simply put, dynamic pricing is a strategy in which product prices continuously adjust, sometimes in a matter of minutes, in response to real-time supply and demand. For example, Amazon is one of the largest retailers to have adopted dynamic pricing and updates prices every 10 minutes.

If you own an e-commerce company, you should seriously consider adopting this pricing model, since it has several benefits for your business. Here are a few of them.

1. It gives you greater control over your pricing strategy.

A common argument against dynamic pricing is that it reduces your control over your products' prices. In reality, it has the opposite effect. As a retailer using dynamic pricing, you'll have access to real-time price trends across thousands of products in your industry. You'll be able to see the pricing changes of your competitors and have a clear idea of the supply and demand of individual products. This will help you set the right prices for different products and maximize your revenue. [Read related article: Your Guide to Creating a Small Business Marketing Plan]

2. It allows flexibility without compromising your brand value.

Many e-commerce retailers shy away from dynamic pricing because of the potential damage to their brand value and user experience. After all, consumers can easily mistake your fluctuating product prices for manipulation or even fraud, right?

Wrong! You can actually protect, and even strengthen, your brand value by implementing dynamic pricing. You can set a price floor that reflects your brand value and allows them the flexibility to stay profitable. You can use dynamic pricing to launch seasonal and promotional offers as well, while remaining profitable (something quite difficult to achieve with a flat pricing model).

3. It saves you money in the long run.

Dynamic pricing is based on the changes in real-time product supply and demand. It takes into account the price fluctuations in the market, monitoring competitor activity and individual products' demand and supply. This gives you the right data and information to set optimal product prices and stay profitable despite the price fluctuations.

This saves you money in the long run. Since all the calculations are done by web-based software and applications, there's no need to spend time and labor (and therefore money) on manual calculations and related administrative activities. The reduction in this overhead adds to your ultimate profitability. [Read related article: Tips to Improve Customer Service on Your E-commerce Site]

4. You can manage it effectively with the right software.

Monitoring hundreds of thousands of products and keeping an eye on the real-time supply and demand trends is a highly complex and challenging task, beyond the scope of most e-commerce businesses. However, you can manage it easily with the right e-commerce software. It takes the guesswork out of dynamic pricing, automating the whole process to provide you accurate data that you can use to set optimal product prices. Global corporations like 3M, McAfee, and AT&T have utilized dynamic pricing and MAP (minimum advertised pricing) enforcement over the last several years. [Check out our reviews of the best credit card processing options for small businesses to help you stay competitive.]

5. It's not error-free, but you're still in control.

Dynamic pricing is based on changes in supply and demand. As with any technology-based forecast, there is potential for error in dynamic pricing algorithms. Even if the proposed pricing is inaccurate, though, it's still just a proposal. You remain in control all the time and can review the pricing changes that your application recommends.

Moreover, the experiences of companies like Amazon, Best Buy, and Walmart indicate that not only are potential errors easily manageable, but they usually do not have a significant impact on the overall profits, since the changes are so frequent.

E-commerce retailers have grown in numbers over the last few years. As an online retailer with ever-increasing competition, you face the tough challenge of maximizing profits while keeping your prices competitive. Dynamic pricing is the ideal solution to this problem, since it takes changes in supply and demand into account to recommend the optimal prices. If implemented for a sustained period, this pricing strategy can significantly boost your overall revenues and profitability.

Dynamic pricing FAQs

What is dynamic pricing?

Dynamic pricing is a strategy of pricing products based on various external factors, including current market demand, the season, supply changes and price bounding. Dynamic pricing changes may occur within minutes. The main idea behind dynamic pricing is that it is flexible and based on real-time data.

Dynamic pricing is typically only used for e-commerce. Since brick-and-mortar stores' prices are more difficult to change, they use set prices that will last for longer periods. Dynamic pricing, meanwhile, relies on real-time supply and chain trends. Forr example, if stock for a particular product drops on an e-commerce site like Amazon, you'll likely see a surge in the price within minutes. Walmart is another example of a major company that uses dynamic pricing to stay competitive.

Why is dynamic pricing important?

Dynamic pricing keeps you on top of your competition. With a price optimization software program, you can track your competitors in real time to evaluate trends and make decisions about any pricing changes they want to enable.

Dynamic pricing also gives you more control over your prices. Instead of watching and waiting to see if your products and services are priced effectively, you can change prices within minutes, with near-instantaneous results. Dynamic pricing can save you money because it involves the collection and use of data to make intuitive changes in prices quickly.  

What is an example of dynamic pricing?

There are multiple types of dynamic pricing methods that a business can use. Here are a few examples of how companies can change their prices in a flexible manner.

  • Peak dynamic pricing: Prices are higher during a product's peak seasons. For example, if you sell swimsuits or pool supplies, you can charge more for them during the summer, and more for popular gifts during the holiday season. 
  • Segmented dynamic pricing: This type of dynamic pricing is based on geography. For example, you could charge more for your products in areas with a higher annual cost of living (and therefore higher-income customers).
  • Market changes: Supply and demand can increase or decrease the price of a product. Naturally, you'd charge less for a product that you have in excess, and more for a popular product that you are running out of.
Image Credit: shironosov / Getty Images
Jawad Khan
business.com Member
Jawad Khan is a content marketing consultant and a freelance blogger for hire. Follow him on his blog Writing My Destiny.