How these 8 brands drove massive success from Dynamic Pricing (and you can too!)
Dynamic pricing has gained relevance over some time. The array of benefits it brings has done wonders for companies who have implemented it in their marketing strategy.
Dynamic pricing refers to a continuous change in the price of products in a short amount of time due to changes in supply and demand. One of the prominent examples for firms who adopt this strategy regularly is Amazon, the e-commerce giant known to update prices every ten minutes.
This pricing model is for those e-commerce players who constantly need to up their game to beat out the competition and provide their customers the most competitive prices in real-time.
Advantages of dynamic pricing
The constant updating of price in response to changes in supply and demand is dynamic pricing. This approach enables large and small companies to improve their margins rapidly. In addition, dynamic pricing provides the required flexibility to a business so that the latter has control over the pricing strategy. To understand the reasons for implementing dynamic pricing, let us look at the below points.
1. Provides control over pricing strategy:
In contrast to the opinion that dynamic pricing decreases control over product prices, the business has the power to set the prices. As a business owner using dynamic pricing, you get access to real-time pricing trends for several products in your niche. This pricing model will also give you an insight into pricing modifications carried out by your competitors and the demand and supply of individual products. With all this necessary information, you will set favorable prices for your products and maximize revenue.
2. No Compromise on brand value:
There are e-commerce retailers who believe that dynamic pricing can harm their brand value and user experience as the consumers can misunderstand the fluctuating product prices for manipulation. But, this is a misconception. With dynamic pricing, the brand value gets strengthened. The strategy can find its application during seasonal and promotional offers. A retailer can establish a price floor that exhibits the brand value and allows flexibility to keep the business profitable.
3. Cost-efficient in the long run
Dynamic pricing takes into account the price variations in the market. It monitors the competitor activity and the product demand and supply. Therefore, the data obtained provide a business with accurate information to fix optimal product prices and remain profitable rather than fall prey to price fluctuations. Further, you do not need to sweat the calculations as specific software tools do them. Now that overhead cost is reduced, you can achieve maximum profitability.
4. Effectively managed with the right software:
Careful monitoring thousands of products and focusing on the real-time supply and demand market trends is not a walk in the park. It is a complex job and not something every business can do on its own. Luckily, this task is easy with the right e-commerce software. With the speculations taking a backseat and the automation of the process, you will have accurate data to set optimal product prices.
5. Not error-free, but the business stays in control:
It would be false to state that there would be no error in the technology-based forecast. It will so occur due to possible errors in the dynamic pricing algorithm. However, the positive side here is that even when the proposed price is available, you are in control to accept it or review the pricing changes that the application recommended.
Moreover, the probable errors are easy to manage and mostly do not substantially affect the overall profit. The e-commerce industry has boomed recently, and as an online retailer, your prices have to be competitive to handle other players. It is possible through dynamic pricing as it considers the shift in supply and demand to suggest optimal prices.
6. Higher responsive repricing:
The price drop will increase sales and therefore help meet revenue goals. Adopting a strategy like dynamic pricing will help reduce prices according to the market trends, internal stock levels, and competitor data. It will also enable the faster movement of inventory faster when required.
7. Dynamic pricing contributes to maximizing profits:
At first, dynamic pricing may come off as a process where product price gets cut to gain a competitive advantage. However, it is much more than just price cuts. It can also include increasing the price of a product which will gain from a surge in the prices. In addition, the constant change in the market can influence the prices, be it increase or decrease. Meanwhile, the dynamic pricing strategy deals with maximization of profit no matter the market condition.
8. Automation saves time and cost:
Using an automated system will save you from the truckload of work. A dynamic pricing software will keep businesses up-to-date on competitor pricing, pricing trends and always in the know of the ever-fluctuating market. Manually repricing thousands of SKUs is no joke and will consume time and energy. So instead, opt for automation for better results.
Challenges in dynamic pricing
Before considering dynamic pricing, it is also important to note the challenges behind implementing the same. Although there are advantages, dynamic pricing is hard to implement. There will be difficulties finding the resources for a small company, while big companies will face the gauntlet for having fewer transactions, complex contracts, or insufficient data hygiene. However, the biggest obstacle will be consumer defiance.
Although there is a shift in the markets' operation now (even a few grocery shops use dynamic pricing), some industries, consumers, and laws continue to be firmly against dynamic pricing.
How to implement a dynamic pricing strategy in your business?
There are five core points that are to be kept in mind before you can implement a dynamic pricing strategy:
1. Specifying the commercial goal:
It is necessary to specify the reason your business is in existence. Next, you determine what your customers can expect from the business and the product/service you bring to the market? You must also define whether you want to be known as providing pocket-friendly services or more premium services. Upon defining the objectives, you will be able to build a strategy to fulfill the commercial goals.
2. Formulating a pricing strategy:
Once the commercial objective is determined, next comes the formulation of the pricing strategy. For example, if the aim is to increase market visibility, you should set competitive prices on popular products. Then, after customers purchase the product, direct their attention to the less popular products. This step will fall in place as per the business needs.
3. Selecting pricing methods:
There are several pricing methods to choose from, but the most common are:
a) Competitor based-pricing - where prices are adjusted based on the competition.
b) Value-based pricing - this method takes into consideration the customer perception of the product.
c) Cost-plus pricing - the costs of production involved in making the product plus the margin you want will be the price fixed for the product.
Depending on the business objectives, you will have the option to pick one or choose all three methods simultaneously.
4. Setting pricing rules:
For efficient decisions, the pricing tools require your input. After selecting a pricing method, the next step is to set the pricing rules. If elasticity is what the price is dependant on, you allow the algorithms to come up with a decision. There are generally two steps at this point: choosing the products and formulating the pricing rule.
5. Validate and test your strategy:
This is the final part of the implementation of dynamic pricing. Here you have to test and validate your strategy. First, of course, checking whether the rules are working is what should be the focus. But since it will be an automated system, there should be no significant hiccups. Then, a while later, the results obtained can be monitored and evaluated to see whether you achieved the business objectives.
Companies that inculcated dynamic pricing model into their marketing strategy
Global corporations, including Amazon, are known for using dynamic pricing and are considered a fine example of this pricing model. Amazon tends to price products competitively and update prices every ten minutes. Thus, the prices change when the customer adds a product to their cart and pays for it. As per data, the quickness in the change of prices has accelerated Amazon's profits by 25%.
This feat is not easy, and it involves collecting lots of data, monitoring competitors' prices, and the data received from its transactions. Then, Amazon, with its Machine Learning algorithms, predicts product sales and sets the price accordingly.
The ride-sharing giant Uber is also known to use a dynamic pricing strategy through which it controls the prices that customers pay.
Uber also uses Machine Learning to forecast market conditions that contain everything from traffic and weather to local events and global news for the pricing strategy to work. As a result, Uber can adjust prices frequently (up to every five minutes when surge prices are in use) depending on the changing condition. To reach an optimal fare, Uber has to access an enormous amount of real-time data.
In the hospitality industry, one company that stands out for choosing dynamic pricing is Airbnb. However, the company serves as a platform for third-party hosts to list rentals. So, it is technically up to the host to choose or drop Airbnb's pricing strategy ( Smart Pricing). This strategy automatically adjusts prices within a limit that the host can set. Airbnb considers several factors for setting the prices:
Listing type and location
Customers search for similar listings
Quality of the listing and the amenities present
The number of views and reviews
Seasons and demand
Time left to book
How often a host decides to host
In the absence of Smart Pricing, Airbnb uses dynamic pricing to create price recommendations, and when a host follows them, their listings are four times as likely to be booked.
The search engine giant Google uses dynamic pricing for Google Ads (keywords). It is by determining the real-time supply and demand rate in the market. So, for instance, you wish to target the keyword 'gift' in the holiday season, which would come at a much higher price than any other day.
5. General Motors
Dynamic pricing in auto-parts is what was first implemented by GM in 2014. It used mypricelink.com to deliver original GM parts to shops. Ford soon followed in GM's footsteps in 2018. The key for collision shops is the knack to prepare quotes for their customers and insurance agencies immediately.
A few years back, Disney introduced dynamic pricing in their theme parks. Unfortunately, there was also a change in prices that depended on three categories of dates: value, regular, and peak. As a result, prices differed for Disneyland and Walt Disney World.
7. Major League Basketball
Professional sports have embraced dynamic pricing, even Major League Baseball (MLB). These use the shift in demand and supply to set the price of tickets. The adjustment of prices will also depend on other variables such as weather and team performance.
The airline industry is the earliest adopter of dynamic pricing. For example, a ticket for the same flight to the same destination can have different prices for different customers even on the same date. Because airlines are known to charge varying prices for the same ticket bought on different days, it was no secret that airlines undertake dynamic pricing.
Apart from the companies above, Lyft, 3M, McAfee, AT&T, Walmart, etc., also have used dynamic pricing to set optimal prices for their products/services.
Implement Dynamic pricing with a price scraping tool
Outdated pricing data can damage even the best pricing strategy and tank your profits. As a result, price scraping has gained prominence and has cemented its value in various business forms in the current era. Pricing data extraction done in real-time pricing data guarantees that your prices are up to date. In addition, it will make it easier to understand market trends.
There are massive data available on the web. Having access to this data is like hitting the jackpot. But it is not an easy task and certainly not something anyone can do manually. For example, manually tracking the prices of thousands of sites is not practical or cost-effective. Thus, the only way to leverage the abundant data is via some automation. It is where Datahut's sound scraping service does the job perfectly.
Datahut's price scraping service provides high-quality, competitive data that will help you formulate an effective pricing strategy. A good pricing model will also help in building customer loyalty. In addition, with an effective price scraping tool business can increase its market share by negotiating better deals with vendors. As a result, even the market-driven strategy gets an upgrade.
Contact Datahut to learn how you can implement a dynamic pricing strategy in your business.