Ecommerce is a world of perfect competition. Your competitors, their products and their prices are just a click or web search away.
Convenience and price drive online shopping. So there is no hiding from price competition and its margin-squeezing consequences. That means smart ecommerce sellers have to ask: How can I transform ecommerce pricing from a competitive issue into a competitive advantage?
The secret? Dynamic pricing.
Dynamic pricing in ecommerce has revolutionized the way online businesses set and adjust their product prices in response to real-time market conditions. In online retail, where competition is fierce and consumer behavior can change rapidly, pricing agility can increase revenue, drive higher margins and even improve inventory management.
Here’s our complete guide to dynamic pricing in ecommerce: what you need to know and a detailed action plan to get started.
What is Dynamic Pricing?
Dynamic pricing is a competitive strategy that changes pricing displayed online to adapt to real-time market demands and consumer behavior. Unlike static pricing, which sets fixed prices for goods or services, dynamic pricing adjusts prices based on factors such as demand, competition, inventory status, fulfillment options, shopper behavior and other market conditions.
Dynamic pricing is nothing new. The travel industry was an early adopter of dynamic pricing since unsold airplane seats or vacant hotel rooms become worthless once the flight is airborne or night falls. So their prices fluctuate based on factors such as seasonal demand, time until departure or check-in, and – with the advent of ecommerce – even the user’s browsing history.
But ecommerce has driven dynamic pricing to evolve from simple demand-based pricing to sophisticated algorithms that encompass a wide range of pricing variables. That’s because the key driver behind dynamic pricing is data. And most ecommerce platforms and channels are set up to collect and process massive amounts of data.
Sellers leverage advanced analytics and algorithms to analyze this vast amount of data, including consumer preferences, competitor pricing, internal factors such as inventory levels and margin requirements, and external factors like seasonality or economic conditions. By understanding these variables, brands and other online sellers can dynamically change prices to maximize profits or achieve other business goals.
The Benefits of Dynamic Pricing
Benefits of implementing a dynamic pricing strategy include:
Dynamic pricing enables sellers to maximize revenue by adjusting prices in response to fluctuations in demand. During peak periods, prices can be increased to capture additional profit, while discounts and promotions can be strategically employed during slower times to maintain competitiveness and sales velocity.
Gaining Competitive Advantage
By responding quickly to changes in competitor pricing on Amazon and other marketplaces, businesses can gain a competitive edge and attract or retain price-sensitive customers.
Dynamic pricing platforms can leverage customer data to tailor prices that are personalized to the unique shopper based on individual preferences and their online behavior. This personalized approach enhances the customer experience, fosters brand loyalty and encourages repeat business.
Optimizing Inventory Management
Dynamic pricing helps in efficient inventory control by preventing overstock or stockouts. Prices can be automatically adjusted to clear excess inventory or capitalize on high-demand periods.
With the ability to adjust prices and maximize inventory ROI in real time, sellers can optimize bottom-line margins.
How Dynamic Pricing Works
At its core, dynamic pricing for ecommerce relies on sophisticated algorithms and data analytics. These tools analyze a myriad of factors, including supply and demand, competitor pricing, customer browsing behavior, inventory status, shipping and fulfillment costs, and even external elements like economic trends. By processing this wealth of information in real time, ecommerce platforms can make instant pricing adjustments to optimize their revenue.
There are three basic components of dynamic pricing:
The “Floor Price”
The floor price is the minimum price you are willing to charge for the product. Setting the floor price is a critical part of dynamic pricing since all the price adjustments you make will be based on the floor price.
Often the biggest component in setting the floor price is the product cost. But understanding product cost is not as straightforward as you might think.
A few of the components that need to be factored into the product cost are:
The actual product “cost”: Determining the basic product cost can be complex since the product may be available from several sources or may be subject to sudden cost changes due to factors such as seasonality, raw material changes or tariffs.
Fulfillment and shipping costs: These will often vary by fulfillment location and method and can be affected by additional factors such as location-specific negotiated carrier rates, cartonization decisions and seasonal upcharges. Fulfillment costs could also include costs such as long-term storage fees for slow-moving products at FBA or a 3PL.
Sales costs: Sales commissions and seller fees vary by sales channel and even by category within a sales channel.
Specialized packaging costs: For some products, such as food that needs to be kept cool, these costs can vary dramatically depending on where the product is shipped and the time of year.
Overhead costs: These might include payroll, rent, utilities, insurance and other costs of doing business allocated to the product. Often a minimum acceptable margin percentage is added to the floor price calculation to cover overhead.
Once the floor price is set, the next step in driving a dynamic pricing system is to ensure that pricing adjustments support an overall sales strategy. This is especially important when selling across multiple online and brick-and-mortar channels or when the selling strategy includes selling direct to consumers along with supporting retailers, resellers or distributors selling the same product.
The Sales Strategy
Dynamic pricing isn’t just about blindly allowing automation to modify prices to meet market conditions. It needs guardrails to ensure the online pricing strategy fits into an overall go-to-market strategy.
A few of these strategic concerns could include:
MAP Pricing: MAP stands for Minimum Advertised Price. Brands create MAP policies to outline the minimum price that retailers can display when they advertise their products. Sellers can charge less for the product, but they can only advertise prices down to the minimum MAP price. A MAP policy is used to ensure that the brand’s product is not devalued by customers due to price wars or excessive discounting. In setting up a dynamic pricing system, floor pricing plus minimum margin requirements need to align with MAP pricing policies.
Channel Conflict: Dynamic pricing can inadvertently lead to conflicts with the brand’s other sales channels, such as brick-and-mortar stores, third-party resellers, dealers and distributors, or other online marketplaces. To mitigate this challenge, ecommerce businesses must prioritize transparency by clearly communicating the factors influencing price fluctuations to build trust with customers and channel partners. Setting the dynamic pricing strategy with the objective of maintaining price consistency across sales channels also helps to prevent confusion and ensure a seamless shopping experience.
“Ceiling” Price: While setting a floor price determines the minimum acceptable price for the product, for some products it may be wise to set a ceiling price – which is the maximum price that will be charged for the product. Why not sell for as much as the market will bear? Some sellers have been accused of price gouging when supplies of essentials dried up during COVID or after natural disasters and their pricing engine kicked in to set the maximum price with no top-end “fail safe”. Setting a maximum price helps to avoid the perception of price gouging.
Regulatory Compliance: Some categories of products may be subject to state or other governmental pricing oversights. Adhering to state pricing regulations and avoiding anti-competitive practices is essential. Businesses must be aware of local and industry-specific regulations to avoid legal complications.
Brand Perception: Frequent price fluctuations may impact how customers perceive a brand. Striking a balance between dynamic pricing for competitive reasons and maintaining a consistent brand image – which includes pricing – is critical for long-term success and building a loyal customer base.
While dynamic pricing offers a competitive edge, brands must ensure that pricing changes support their sales and brand strategy to not only capitalize on the benefits of dynamic pricing but also maintain a consistent, positive customer experience across sales channels.
The Pricing Triggers
The third component needed to implement a dynamic pricing strategy is determining what changes should trigger a pricing adjustment. These could include:
Real-Time Demand: Monitoring and responding to fluctuations in consumer demand in real time allows for dynamic pricing adjustments to capitalize on peak periods or stimulate sales during slower times.
Competitor Pricing: Keeping a close eye on competitors' pricing strategies helps businesses stay competitive. Dynamic pricing can be triggered to match, undercut or differentiate prices based on the competitive landscape.
Product Cost Changes: Changes in production costs, shipping fees or other operational expenses can trigger dynamic pricing adjustments to maintain profit margins.
Customer Location: Prices can be adapted based on the location of the customer while considering factors such as shipping costs, local demand or regional pricing strategies.
Inventory Levels: Dynamic pricing can be utilized to manage inventory levels effectively. As stock levels decrease, prices can be adjusted to maintain the balance between supply and demand. Triggers can also be set around inventory age and sales velocity to drive inventory turns.
Promotional Events: Dynamic pricing can be triggered during promotional events, sales or special occasions to create a sense of urgency and boost sales
Seasonal Trends: Adapting prices according to seasonal demand variations enables businesses to optimize revenue during peak seasons and clear inventory during off-seasons.
Time of Day/Week: Different times of the day or week can be associated with varying levels of customer activity. Dynamic pricing can be triggered to attract customers during low-traffic periods or to maximize profits during high-traffic times.
Customer Segmentation: Analyzing customer data allows businesses to tailor pricing strategies based on different customer segments, behavior or purchase history. Offering personalized pricing can enhance customer loyalty and satisfaction.
If all of this sounds complicated and complex, that’s because it is. And remember, it’s all happening in real time. But fortunately, dynamic pricing perfectly lends itself to automation. Once you have the data and pricing rules in place, automation can do the rest.
Increasing Ecommerce Revenue with Dynamic Pricing
Boosting ecommerce revenue is an ongoing challenge, and dynamic pricing has emerged as an effective strategy for driving top-line revenue.
As we’ve seen, the dynamic approach involves adjusting product prices in real time based on a variety of factors. The goal: get the sale to increase revenue while still meeting margin expectations.
By automatically adapting prices to real-time market conditions, businesses can maximize topline revenue during peak demand. Sellers can gain a competitive advantage by aligning prices with or undercutting competitors. And sellers can personalize offers based on customer behavior, fostering loyalty and repeat business.
These and other dynamic pricing capabilities help ensure sellers maximize top-line revenue from their ecommerce channels.
Increasing Inventory ROI with Dynamic Pricing
Too often, brand managers view dynamic pricing only as a tactic for driving revenue. And it is. But, given the right software platform, dynamic pricing can also be a powerful tool for ecommerce businesses looking to maximize their return on investment (ROI) in inventory management
Some dynamic pricing platforms such as the Etail ecommerce control tower can consider factors such as inventory location, inventory stocking levels, inventory turn levels, and inventory age in setting pricing. This allows businesses to strategically set prices to promote the sale of overstocked or aging items through discounts. That cuts excess inventory and reduces overstocks to improve inventory ROI. At the other extreme, when inventory is tight, prices can be increased slightly to maximize revenue from the available inventory and slow the influx of orders, preventing stockouts.
Boosting Ecommerce Margins with Dynamic Pricing
Ecommerce margins are tight and getting tighter.
Dynamic pricing offers a road to improving – or at least maximizing – margins on every sale.
Dynamic pricing aligns pricing with product costs and responds to changes in fulfillment cost, ensuring that product prices reflect real-time changes in production and supply chain expenses. When faced with rising costs, sellers can automatically adjust prices to protect or maximize margins without sacrificing competitiveness.
The Etail system, for example, considers product cost and total fulfillment cost by location. Fulfillment cost is calculated down to the level of negotiated carrier rates and packaging options. Pricing and delivery options can be dynamically updated based on the shopper's location. Combined with power tools like dynamic order management (which automatically routes the order to the lowest cost fulfillment option) and cartonization (which automates selecting the best, lowest-cost packaging option), systems like Etail ensure that orders aren’t just managed, orders are optimized make the most margin possible from every individual order.
Implementing Dynamic Pricing
Implementing dynamic pricing is a strategic decision that requires careful consideration of your business needs, growth plans, system capabilities and supplier support.
Here’s a step-by-step approach to implementing dynamic pricing and choosing a platform to support your dynamic pricing strategy.
Understand Your Business Needs
Before diving into the market of dynamic pricing solutions, it's crucial to understand your specific business requirements. Identify and prioritize your goals, whether it's maximizing revenue, optimizing profit margins, managing inventory, or offering personalized pricing. Knowing your objectives will guide you in choosing a solution that aligns with your unique needs.
While implementing dynamic pricing may seem like a product management or sales decision, the strategy will affect other functional areas such as finance, operations and logistics. Our free whitepaper, Selling to the Team, covers how to get input and gain consensus from other internal stakeholders for your product.
Collect and Analyze Data
Begin by collecting relevant data, including customer behavior, competitor pricing, and market trends. Identify key factors influencing pricing decisions, such as demand elasticity, seasonality, and competitor behavior.
It can sound overwhelming, but remember, in more than a decade of working with customers to implement dynamic pricing strategies, Etail solution engineers have confirmed: the 80-20 rule often applies when getting started with dynamic pricing. Some 80% of the impact of dynamic pricing will come from about 20% of your product line. Focus on those products to get started.
As your ecommerce business grows, so should your dynamic pricing solution. Ensure the selected solution can scale seamlessly to accommodate an expanding product catalog, increased customer base, and new or expanded online sales channels. The Etail system, for example, originally was designed with the help of giant resellers to support their massive product catalogs, sales across dozens of online marketplaces, sourcing from hundreds of suppliers, and intense price competition for commoditized products. Using the Etail dynamic pricing tool, some of these sellers reprice their product offerings 600,000 times per hour. Scalability is essential for long-term success and adaptability. Make sure you don’t outgrow your dynamic pricing platform.
Require Multi-Channel, Real-Time Data Processing
Dynamic pricing relies on real-time data analysis to make swift and accurate pricing decisions. You’ll need a solution that can process vast amounts of data in real time. In most cases, you’ll also be selling across multiple sales channels including marketplaces like Amazon or Walmart; specialized sites like Wayfair or Reverb; retailer sites such as Target, Michaels or Best Buy; or your own site powered by shopping carts such as Shopify, Magento or Big Commerce. Each of these sites provides and requires data in their own format -- called their “taxonomy”. To be able to dynamically reprice across channels, you’re pricing software will need to handle all these different taxonomies. Etail, for example, collects data from all your channels, aggregates and normalizes the data so you view everything in a single format, automates making your pricing adjustments, and then pushes them out to the channels in the unique format each channel requires.
Confirm Integration Capabilities
Ensure that the chosen dynamic pricing solution integrates seamlessly with your existing ecommerce platform, inventory management system, and other relevant tools. Compatibility and ease of integration are essential to prevent disruptions in your operations; reduce the need for internal IT support and resources; and create a solid, resilient tech ecosystem.
Consider Customization and Total System Capabilities
Every ecommerce business is unique and your dynamic pricing strategy should reflect that. Look for a solution that offers customization options, allowing you to tailor pricing strategies based on your business objectives, industry specifics, channel requirements and customer behavior. Also consider additional system capabilities that can complement dynamic pricing like distributed inventory management, distributed order management, dynamic content management and cartonization. Working together with dynamic pricing, these tools can drive maximum profitability from every order you take.
Examine Analytics and Reporting Capabilities
Comprehensive analytics and reporting features are vital for monitoring the performance of your dynamic pricing strategy. Look for a solution that provides actionable insights, detailed reports and visualization tools. Access to data-driven analytics empowers you to make informed decisions and refine your pricing strategies over time.
Don’t Forget Customer Support and Training
The implementation of a dynamic pricing solution will come with a learning curve. Choose a provider that offers robust customer support and training resources. Responsive customer support ensures that any issues or questions are addressed promptly, minimizing downtime and optimizing the efficiency of your dynamic pricing implementation.
Implementing dynamic pricing in your ecommerce business requires a strategic and data-driven approach. By leveraging advanced analytics, setting clear objectives, and investing in technology, businesses can optimize revenue, enhance the customer experience and stay competitive.