Dynamic pricing is a flexible system for repricing goods depending on changes in market conditions. Dynamic pricing strategy relies on factors such as competitor prices, supply and demand elasticity, etc. Specially developed pricing algorithms and techniques allow companies to optimize prices in real time.
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What is pricing
Pricing is a mechanism for setting the price for a service or product, taking into account internal and external factors. With a competent analysis of these factors, the company offers its product at a price that the consumer can pay, and the seller can make a profit.
Internal factors include:
- • Production costs
- • Features of the production process (mass or individual)
- • Labor costs, taxes, rent, etc.
There are much more external factors.
Competition.
The larger the market, the higher the need to focus on the analysis of prices for a similar product from competitors. Price tags on competitors' products are one of the determining factors in a company's own pricing.
Elasticity of demand.
An increase in demand allows you to raise prices, a decrease - a signal to reduce the price tag.
The target audience.
The solvency and preferences of consumers of the company's product affect the level of its price.
Supplier terms.
The lower the price of raw materials, the lower the cost of goods, respectively, and for the consumer, you can set a low price. Otherwise, you will have to make a surcharge that is not related to production costs. For example, increasing tariffs for gasoline, gas, electricity, etc. can significantly increase the cost of goods.
Economic conditions.
The decline in economic growth also implies a drop in business activity. Under these conditions, prices for certain types of goods and services may fall. Conversely, during a turbulent economic boom, an increase in consumer income can lead to higher prices.
Inflation.
One of the factors that can significantly affect pricing. During inflation, money loses its value, and tariffs can rise at an accelerated pace. As a rule, this is due to an increase in world rates for commodities, for example, oil, gas, energy resources, and agricultural products.
Stages of forming a pricing strategy
Before you put a price tag and wait for an influx of customers, you need to think through all the components of the pricing strategy. Set low prices - dumping will begin, you will be left without profit, set a high price tag - you will only have to dream of sales.
Necessary:
- formulate business objectives and goals.
Before launching a new product, think about what goals the company should achieve: increase profitability, cash flow, conquer a new niche in the market, satisfy the needs of existing customers or build a database, reach a new audience.
- Determine the target audience.
The target audience is a group of people who are more likely to be interested in the product and have the financial ability to purchase it.
To collect a database and create a collective portrait of the target audience, consider gender, age, financial status, marital status, their preferences, field of activity, interests, location, etc.
- To study the competitive environment.
Monitor competitors' prices and analyze their strategy for working with the target audience. This will help you decide on your pricing strategy.
- Estimate costs.
If you want to make a profit, take into account all material investments in production and sales: the cost of raw materials, payment for site administration and hosting, taxes, shipping, marketing costs.
Divide all costs by the number of units produced and determine the cost per unit.
- To choose a pricing strategy.
Pricing Strategies
Pricing methods are the principles a business relies on to set prices for products or services. Only a deep understanding of products, the market and customers can provide a competent approach to choosing a pricing strategy.
The main three methods of pricing in trade are:
- - Cost plus pricing.
- - Pricing based on competition (competitive).
- - Value based pricing.
1) Cost plus pricing.
When using this method, the retail price takes into account all the costs incurred by the company.
One type of such pricing is mark-up pricing.
Each industry may have different rates. Retailers can also set their own markup. For example, one music store makes a markup of 50% on guitars, that is, its cost will be equal to the purchase price plus 50%. Another music store can make a lower margin, then the price of this guitar for the buyer will be lower.
2) Pricing based on competition (competitive pricing) is based on regular price monitoring and competitor strategy analysis. Regular monitoring prices of competitors will provide an opportunity to develop your own strategy: reduce prices or, conversely, increase if your product and service is of better quality.
It is the price that forms the first impression of the store among potential buyers, so the key to success in most cases is the presence of an effective pricing system.
Of course, you can choose one proven markup method and use only that one. You will achieve the greatest success if you vary several proven pricing methods depending on the tasks at hand.
Let's look at the most effective methods and situations for their application.
the most effective tool for comparing prices of online stores.
3) Pricing based on demand.
By tracking demand for their product, companies set prices. If demand falls, prices fall, demand rises, you can set a higher price.
Pricing methods. Pros and Cons of the Top 3 Methods
| Name | Pros | Cons |
| Cost based pricing. | Does not require additional research and covers all production costs. | Not always effective, as it is practically cut off from customers. |
| Pricing based on competition. | Pretty accurate, simple method. It is enough to regularly monitor competitors. | Often the competitive race for the client leads to dumping and price wars. |
| Demand based pricing. | Growing demand allows you to increase prices and, consequently, profits. | During a period of reduced demand, it is necessary to sell goods at low prices, respectively, the margin decreases. |
Examples of pricing strategies in top companies
eBay
The marketplace illustrates different approaches to pricing.
Some sellers set the price slightly above the cost price for selling in bulk. Others target competitors. At the same time, here you can buy used goods many times more expensive than they originally cost, for example, rare vinyl records. Marketplace auctions are a typical example of value-based pricing.
Netflix
The company is a classic example of a penetration pricing strategy. Netflix entered the market with a record low subscription fee in the market - $7.99. Then the tariffs began to gradually increase, but the service continues to retain and attract new customers.
Shopify
This platform offers the e-commerce marketplace software that helps manage sales in online stores and integrates with HubSpot. Unlike its competitors, Shopify offers several variants of its product with different functionality and, accordingly, at different prices. This approach allows you to adapt your product to any business on the market. Fees remain competitive and sometimes even lower than other similar e-commerce platforms, as evidenced by price monitoring of marketplaces.
Techniques of pricing in e-commerce
The key to business success in most cases is the existence of an effective pricing system. Of course, you can choose one proven technique and use only it. The greatest success can be achieved if you vary several proven methods of pricing, depending on the tasks.
Let's look at the most effective techniques and situations for their application.
Budget price
This technique is the most suitable option for large and wholesale sellers. It is based on the principle of keeping the lowest cost-effective price for the longest possible period. This allows you to win a certain segment of the sales market in the shortest possible time.
Promotion price
This strategy is most often used if you need to attract new customers and increase turnover. The price reduction will be short and "promotional": for example, buy 2 products and get 3 as a gift.
Price-penetration
This pricing technique is used when introducing new brands, goods, services to the market or increasing the potential client audience. At the time of acquaintance with a new product, prices are set low in order to increase customer interest and stimulate them to re-purchase. After a while, the price rises to the optimal level.
Premium price
These pricing techniques are used when your offer in the market is exclusive and unparalleled. You can set the highest possible price, without looking at the prices of competitors. This pricing principle is most effective in areas where customers are willing to pay more for a unique product or service.
Price reduction (skimming pricing)
When a new product is launched on the market, the highest possible price is set, which is designed for potential buyers. Thus, the seller expects to receive an extremely high profit. When the market is saturated with a novelty and the hype passes, the price goes down. Skimming is used to launch new technology and electronics products on the market. This strategy is followed when selling iPhones, TVs, laptops, video games, etc.
Psychological cost
This strategy is used to boost sales and increase turnover. You've probably come across the $199, $1999, $2999 price types and wondered why they weren't rounded up. At first glance, the difference in $1 cost to retailers is negligible. However, if we consider the total volume of sales, the difference will be significant. This technique is based on the theory that some numbers have an impact on us and stimulate purchases.
Competitive price
This pricing principle is most common in a market segment with a high level of competition. It is based on the fact that your prices for goods or services are on par with competitors. In this case, price monitoring - having up-to-date information about the situation on the market will be the key to success and the basis for effective pricing..
Dynamic pricing in e-commerce
If even in the recent past, prices for goods in offline trade were mostly static, then the partial transition of the market to the Internet required other, flexible pricing methods.
Thousands of online stores and huge competition have become the engine for the emergence of new solutions and algorithms for analyzing various parameters and optimizing prices on a daily basis. For online stores, new, previously inaccessible automated tools have opened up for regular parsing of prices and the use of competitive and dynamic pricing.
The principle of dynamic pricing can be compared to the stock exchange. The value of securities changes every second depending on the brand, economic condition and demand. Getting the maximum profit is the main goal of traders. Similarly, in e-commerce, the pricing strategy depends on market conditions. A process based on automated market analysis allows you to adjust prices within minutes.
In e-commerce, Amazon pioneered dynamic pricing in 2015. Although historically for the first time this strategy was introduced back in the 80s by American Airlines.
With its dynamic pricing strategy, Amazon has become a leader in the global e-commerce market. Prices on the site are adjusted within a few minutes. Experts predict an increase in sales on Amazon to $ 386.40 billion by the end of 2021. The marketplace already now occupies more than 40% of the US e-commerce market share, and by the beginning of 2022 this figure may grow by another 10%.
Initially, dynamic pricing was used by large corporations to track the prices of their dealers in order to prevent price dumping of their product. Then smaller companies began to use this technology. By analyzing the prices of competitors, they were able to quickly respond to changes and set prices for the market.
Thus, a new era began in e-commerce - dynamic pricing.
Unfortunately, the dynamic pricing method is so young that there are no scientific studies in this area yet. Everything is learned in real time in practice. Dynamic pricing is predicted to become a priority strategy in many industries.
Already now, this strategy, in addition to Internet commerce, is being used in tourism, passenger transportation (taxi), the air transport industry, etc.
For example, prices for plane tickets for the same flight may differ depending on the season, the time of purchase and the service where the purchase takes place.
Taxi Uber is considered one of the cheapest, but on the week-end or under certain other conditions, for example, the end of a significant event for the city, like a sports match or a concert of a mega-popular star, prices increase dramatically. With a drop in demand for taxi services, prices are restored to their previous level. Uber's internal policy is that drivers can set their own schedule for leaving the line. Accordingly, on weekends the number of cars decreases, and prices rise.
A smart pricing strategy allowed the company to increase its revenue to $3.93 billion in the second quarter of 2021, which is twice as much as in the same period in 2020.
Parameters affecting prices in online stores::
- the number of competitors on the Internet with a similar product;
- the level of your price in the market;
- average price of competitors;
- minimum price;
- maximum price;
- the difference between your price and the average in percent;
- purchase price;
- minimum expected profit;
- cost coverage.
These are the main factors, the analysis of which will make it possible to set the MAP. recommended price. Selling at the recommended price will allow the seller to get the maximum profit.
Dynamic pricing in online stores
The Price Controls service offers competitor monitoring with the ability to use a tool to create dynamic pricing algorithms. Test our price monitoring service for free for a month and evaluate the benefits of using it for your business.
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