Dynamic pricing is a strategy that’s been used by companies worldwide for a long time; the airline industry first developed it in the early 1980s. Due to the continuous digitization of the world, dynamic pricing has become more relevant in other industries like eCommerce. If you run an eCommerce store, dynamic pricing is a tool you must use as you stand to gain a lot from implementing it.
However, dynamic pricing has its advantages and disadvantages. This article will discuss dynamic pricing, its importance, and the pros and cons of using it on your eCommerce store.
What is Dynamic Pricing
Dynamic pricing is a pricing strategy that uses different prices instead of a fixed one. This means it’s a strategy whereby product prices can be adjusted according to market factors. A synonym for it is real-time pricing. Dynamic pricing aims to allow businesses to adjust their product prices immediately if there is a change in the market’s demand and supply.
Businesses make changes to product prices based on an algorithm that monitors supply and demand, competitors’ prices, and other factors in the market. Dynamic pricing is important as it helps business owners keep up with market competition and adapt to changes. However, working with this strategy in eCommerce has its good and ugly sides. So let’s examine the pros and cons of implementing dynamic pricing.
Pros of Dynamic Pricing
Boosts Profit & Sales
Dynamic pricing helps create an avenue for eshop owners to increase the prices on products whose demand has increased. Therefore, growing profits on each sale. You can also boost your sales and profits by adjusting your price based on customer shopping patterns.
For example, let’s say your competitor sells a product a customer is interested in for $20 while you sell it for $10. Due to your adoption of the dynamic pricing strategy, you can increase your price to $15. Customers will still buy from you because they feel they are getting a better deal, even though you’re making more profit.
Good Inventory Management
Dynamic pricing helps you manage your inventory. For instance, if you have overstocked products, you could use dynamic pricing to see if you can lower their prices while still profiting from them. This helps you manage your inventory well and prevent goods from staying too long in stock.
Helps you Understand Customer Behavior
Dynamic pricing also helps you understand your customers’ behaviors as well. This is because it enables you to obtain the demand curve for each customer. The demand curve provides information on the minimum and maximum price customers are willing to pay for a particular product. This helps influence and determine how you set your price and maximize profits.
Cons of Dynamic Pricing
Lots of customers do thorough research on products they want to purchase beforehand. Statistics show that 81% of customers do online research before making a purchase. Due to this fact, they know the price a product should sell for.
Thus, if you price your products too high because demand has increased, you could lose customers to your competitors.
Market Price Fluctuation
Making use of dynamic pricing causes serious price changes in the market space. This is because as you try to reduce your price to beat the competition, your competitor is also trying to do the same. This could lead to a race to the bottom and cause unstable price fluctuations in the market.
Just like most marketing strategies in the eCommerce space, dynamic pricing is not a piece of cake. However, carefully strategizing and implementing it in your e-commerce store can be incredibly helpful for your business.
Although many eCommerce platforms support dynamic pricing, it is advisable to get experts’ advice before launching this strategy in your store. This is because the strategy might not be suitable for all online stores.
(Contributed by Oluwafemi Adedeji & Hermes Fang)