Dynamic Pricing – A Profitable Alternative To Pricing Wars

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In the battle for eCommerce clicks and sales, dynamic pricing can help online businesses stay profitable, relevant, and on top of the competition.

Searching for the best prices is a part of a consumer’s due diligence, whether buying groceries at a wet market in Singapore or purchasing a television set in Shanghai. But when a consumer can visit multiple stores with just a few clicks of the mouse, price comparison has become an entrenched ritual in the online shopping experience.

But eCommerce retailers need not start a pricing war to hook fast-fingered online shoppers to the checkout page. Knowing what your competitors are offering helps you chart your own, better path against theirs, and in this, dynamic pricing is a worthy strategy.

Knowledge Is Power And Profits

Dynamic pricing simply means adjusting prices in accordance to market demand and supply in real time. It may sound elementary; after all, who hasn’t compared prices with other shops on the same street? But what dynamic pricing promises over static prices and manual monitoring of competitors, is increased market sensitivity and knowledge — which can help eCommerce retailers make better pricing decisions towards their business goals.

This sensitivity is premised on using competitive intelligence software to collate and crunch large masses of critical data, including prices of a product across the market, price fluctuations and the amount of stock your competitors hold. This produces recommended prices that are lower than your competitors’, yet also advantageous to both the consumer and your business.

The end result is a mark of success for dynamic pricing. Take for example, Amazon — perhaps the largest and most cited user of dynamic pricing, which updated its prices at ten-minute to daily intervals. This yielded them a 27% increase in revenue between 2012 and 2013 — about S$62 billion (US$44 billion).[1]

Even if your online business is not on the same scale as Amazon’s, there is much to cash in on when using dynamic pricing to keep a competitive edge: US$1.4 trillion, which is what Forrester projected online retail sales in Asia Pacific will reach by 2020.[2]

Understanding Your Battleground

Applying dynamic pricing towards your business goals also takes an understanding of the wider terrain in which the competition for clicks and checkouts takes place.

Consumers’ ability to immediately access — via mobile devices and wireless or 4G technology — the latest product prices, specs, reviews and functionality has led to the practice of “showrooming” — when consumers visit a physical store to test out a product, but simultaneously go online to review prices and potentially make a purchase elsewhere. Research from Google found that this behavior was prevalent in Asia’s developing markets, with Vietnamese shoppers leading the way at 40% of their shoppers engaging in in-store price checking.[3]

While showrooming can be damaging to brick-and-mortar retailers, it can complement retailers who adopt an omnichannel approach. Comparing prices and reading peer recommendations are strong reasons for consumers to go online before making a purchase; omnichannel retailers can leverage this by deploying dynamic pricing to match or beat competitors’ pricing across online platforms and in the physical store.

This approach does not mean potentially making a loss. Dynamic pricing software can be configured to prevent underpricing, meaning that price will only move when it is still profitable to do so, rather than always matching competitors’ prices. This gives omnichannel retailers the security that their pricing model will not be subject to volatility, and allows consumers to enjoy the in-store experience and competitive pricing.

Leveraging Data

Retailers can also use the data generated through dynamic pricing to identify trends and forecast price changes. This then allows them to tweak their own to protect future revenue. Take for instance a scenario where the market demand for a product is low. Dynamic pricing may be used in the form of a flash or seasonal sale in order to make the most profit out of the situation and free up inventory for more profitable goods.

Conversely, when market demand is high and stock across the market is limited, an online retailer can safely increase the price of the product, just stopping short of what the competitors offer. This market- and time-sensitive tactic ensures profit maximization in ripe periods, and assures consumers of product availability along with a cost that is hard to beat anywhere else.

This means that during both market highs and lows, dynamic pricing has an insulating effect on an online business’ profit margins, to an extent. In the long run, the ability to offer the best deals to customers also boosts branding in the populated eCommerce space.

The Right Package

Even with all its benefits, dynamic pricing is not applicable to every product or brand. The argument used to encourage online retail businesses to adopt dynamic pricing is often how airlines have benefited in doing so. However, it’s critical to understand the significant difference between the two sectors, and why online retailers cannot imitate the actions of the airline industry wholesale.

Understanding the nuances of consumer behavior in each sector will help online retailers tweak dynamic pricing systems to profit in both accounts books and customer relationships.

For example, the demand elasticity for the products of the airline industry — tickets and available seats — is much lower than that of online retail. There may be a few thousand options if you want to purchase a standing lamp, but there’s far less hassle-free and transit-free options to get to a certain destination from where you are. Online shoppers for retail products are more sensitive to price fluctuations, and changing prices dramatically at different points of the day is likely to erode consumer trust and lead them to competitors.

Dynamic pricing is also just one of the many strategies online businesses can employ to increase customer pool and profits. Complementing dynamic pricing with aspects such as membership schemes, or a user-friendly mobile platform for on-the-go purchases, make for a multi-pronged business strategy that encourages customer browsing and spending and hence, profits — a winning solution for all.


 

 

SOURCES

 

[1] http://www.pymnts.com/in-depth/2014/will-dynamic-pricing-improve-ecommerce-margins/
[2] https://www.forrester.com/Asia+Pacific+eCommerce+Market+To+Reach+US14+Trillion+In+2020/-/E-PRE8924
[3] https://asia.googleblog.com/2014/11/shop-til-you-drop-your-smartphone.html