In the world of e-commerce, there are few things as important as getting the price right. Dynamic pricing fully embodies this principle as it revolves around the art of setting flexible prices on the go. Despite what some assume, this is not really a novelty tactic for raising competitiveness and driving growth. But, the explosive market growth and the advent of big data technology have certainly launched it into the mainstream.
The crucial thing to realize right off the bat is that one cannot engage in this process on a whim and expect great things to come.
The ever-greater market intelligence and advanced software solutions have changed the game for good. Therefore, to elevate profit margins and increase customer satisfaction, e-commerce brands now have to make informed decisions based on multifarious factors. So, before you start emulating what others are doing, take a deep breath. Familiarize yourself with the basics and then tailor this strategy to your specific goals and business context.
Here is how to navigate the maze and make it happen.
The cutting edge of the industry
It always pays off to keep an eye on what industry leaders are doing. Amazon is among companies that were the pioneers of dynamic pricing and it is still killing it.
The e-commerce behemoth is adept at implementing changes on the fly (every 10 minutes on average). Focusing on top-selling and popular products, it has managed to fight off competition over and over again. At the same time, Amazon has found a way to preserve profit margins— charging more for items that are not as price-sensitive. All in all, it is giving us a master class in how to make the most of dynamic pricing.
And this is not some isolated example. Other giants are following suit. Walmart, for instance, adjusts its prices 50,000 times per month and records substantial sales spikes as a result. Many smaller retailers have taken notice as well, developing their own smart strategies. So, what are key lessons can we draw here?
Face value and beyond
First off, the success hinges on constant vigilance, precision, and targeting. With powerful tech tools and an ocean of data out there, one can cater to individual consumers, offering products they want and can afford. Like it or not, the days of fixed prices for everyone are numbered and flexibility makes all the difference.
Secondly, may want to start with the most competitive and visible items, also known as key-value items (KVIs).
In order to gain an edge in the market, most e-tailers choose to sell about one-fifth of their assortment at low prices. The dynamic pricing strategy yields results because people actively search for these products and remember price tags that are attached to them.
And even though this category is fairly limited in scope, it can actually account for the lion’s share of revenue— up to 80%.
Tools of the trade
One of the trickiest parts of developing dynamic pricing is identifying KVIs.
To pull it off, one has to dive into pools of historical data. Namely, techniques like consumer base segmentation and analysis represent the mainstay of dynamic pricing. That is precisely when dynamic pricing solutions come into play. Equipped with features such as big data analytics and machine learning, they crunch huge volumes of data in order to generate pricing recommendations.
Typically, they contain five modules:
- Long-tail module: creates the introductory pricing scheme via intelligent product matching
- Elasticity module: gauges the impact of price on market demand
- KVI module: estimates how individual products shape consumer price perception
- Competitive-response module: sifts through competitive price updates for insights
- Omnichannel module: aligns prices across offline and online channels
So, among other things, dynamic pricing platforms enable you to grasp a complex matrix of factors that influence success, including seasonality, demand patterns, competitive moves, demographics, online metrics (search ranking, impressions, conversion rates, etc.), real-time market trends, etc. You are able to gather and process relevant data, anticipate demand for your products, price them better than your competitors, and coordinate the scheme with brick-and-mortar pricing.
A matter of choice
It is always preferable to opt for sophisticated tools crafted by third-party providers, solutions that have all five modules powered by custom-built algorithms. But, in case your budget does not allow it, you can select off-the-shelf products with at least KVI and competitive-response modules. Another approach is to obtain valuable data with the help of online, business intelligence, and analytic tools.
Google Analytics is one of the must-consider free tools in this area, while Google Shopping poses a non-obvious candidate. It was designed to gauge the effectiveness of paid ads but does the trick nevertheless. Last but not least, cookies are another popular method of acquiring consumer data. Just be careful not to make missteps in the area of user privacy, especially in the light of regulatory overhauls like General Data Protection Regulation (GDPR).
A bridge from theory to practice
The sheer amount of information available and a bunch of technicalities can be overwhelming. Some business owners and managers hardly even know where to start. But, bear in mind that you do not have to really understand fine algorithm workings behind dynamic pricing solutions.
The whole point of technology is to streamline processes and automate decisions and price management. So, think of computer-generated reconditions as mathematical recopies you can decide to act upon. And before you make that decision, you first have to carefully select the inputs and ground rules for re-pricing. It is also highly advisable to carry out pilots in several product categories and then do concept design and testing.
What is more, aim to customize implementation process to suit specific goals, existing infrastructure, and end users (most often category and pricing managers).
Note that you can rely on e-commerce design and development agencies with a proven track record to make this process as smooth as possible. In other words, with experts working alongside your category and pricing managers, you are more likely to roll in solutions with minimum resource waste and unnecessary guesswork. Of course, this is not to say you should neglect internal training opportunities.
In fact, a mix of external and in-house skills and capabilities is what often wins the day.
Making it work
One common mistake to steer clear off is giving the same weight to every factor you are tracking. The most accomplished e-commerce businesses of today tend to pick one key indicator and formulate the whole strategy around it. That is why we often distinguish between demand-based, time-based, and competitive pricing. The common thread between them is an objective of personalizing and customizing offerings for maximum impact.
When it comes to specific goals you can follow they can take many different forms. That being said, maximizing total revenue and increasing productivity should be prioritized over other aspirations. Just try not to have tunnel vision. Dynamic pricing is an opportunity to assume greater control of your overall pricing strategy and accomplish faster responses to demand and market fluctuations.
Once you are clear on objectives and strategic positioning, you need to find suitable products. There are very few hard rules here. You can stick to products that have a certain number of sales per week/months or those are in the same lifecycle. In any event, however, you need to avoid applying the dynamic pricing tactic to your entire catalog. Putting all your eggs in one basket like that can quickly backfire and lead to devastating cannibalization effects.
Along the similar lines, it is not wise to rush your decisions. Take your time to analyze your marketing funnel. See what part of it raked in most sales and focus on optimizing it even further. And do not worry. Users have grown accustomed to frequent changes and they spend a lot of time keeping up the pace with them. They also use different price comparison websites when shopping around.
This may seem like a lot to handle, but you do not have to do it all at once. Besides, rest assured that your efforts will be a drop in the bucket compared to long-term benefits. You have a chance to improve price perception and together with it, consumer satisfaction. If you play it right, you will kill two birds with one stone.
In this information day and age, prices cannot are set in stone. On the contrary, dynamic pricing is the present and future of e-commerce.
To get the ball rolling with it, embrace a test-and-learn approach of constant data analysis and operational flexibility. Do testing and pilots to embed the solution into your workflow. Carefully select your dynamic pricing solution for calculations and predictions. Put the data into perspective and turn it into actionable insights. The more segmented and specific you get, the better it will be for your competitiveness.
Make no mistake: this is a chance not only to optimize prices, but to swiftly respond to shifting consumer preferences, dynamic trends, and competitive campaigns. Thus, if you really mean business, you need to do your homework and outmaneuver companies determined to challenge you on the busy pricing front.