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.
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:
There are much more external factors.
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.
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.
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.
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.
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.
- 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 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:
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.
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.
|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.|
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.
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.
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.
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.
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.
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.
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.
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.
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.
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..
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.
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.
In the future, the pricing algorithm will include factors such as
- fluctuations in the exchange rate;
- elasticity of demand (seasonal or in the context of several days);
- quantity of goods in stock;
- the number of visitors to the page with the product (traffic to the site);
- emergence of new competitors;
- the dynamics of trends in the market of analogues;
- Product life cycle.
If we are talking about a comprehensive pricing methodology, it is useful to analyze the actual resultsand past forecasts.
|Expected income from the application of dynamic pricing and the formation of the recommended price||Actual income|
|Expected level of sales from application of the recommended price||Actual level of sales|
For many companies that do business on the Internet, the concept of dynamic pricing is still fairly new. But it is worth playing ahead of the curve and figure out now what advantages the implementation of a competitive strategy in the field of online sales will provide.
Increasing sales volume.
Based on the analysis of the dynamics of market demand and supply, you will have the opportunity to set up-to-date, competitive prices, which will definitely increase the level of sales.
Sellers who sell goods protected by their own trademark, as a rule, adjust prices no more than once a month or a season. This approach leads to a loss of profit if the price is too low or an outflow of customers if the price is too high. At the same time, the dynamic pricing strategy will allow real-time response to changes in market demand and optimize prices, which will make it possible to receive the desired profit.
Growth in ad conversions.
Uncompetitive prices for your product make it more expensive to attract each customer. Establishing competitive prices through dynamic pricing will increase conversions and return on ad spend.
Opportunity to study your competitors.
The e-commerce market is growing steadily and quality search for brand presence shows that the number of competitors is only increasing. Competitive strategy will provide an opportunity to find out which products on the market are the most popular and at what price. Dynamic pricing will enable rapid optimization of prices for best-selling products.
Sales are not only seasonal.
It is no secret that sales of certain categories of goods, such as air conditioners, grow in spring and summer, and decline in winter, that is, in a certain season of the year, companies' income decreases significantly. Using dynamic pricing tools, you can choose a pricing policy that will be effective even during a fall in demand.
Determine the balance between income and profit.
Every business has a main goal to build a balance between income and profit. And the main variable factor in this matter is the price.
This example illustrates that an increase in income does not always equal an increase in profits.
Using an automated dynamic pricing algorithm will allow you to find a balance between profit and income. Algorithms monitor in real time how price correction affects key indicators.
Ability to segment your customer base.
The implementation of a dynamic pricing methodology will make it possible to analyze the behavioral patterns of customers and obtain information of the following kind:
- frequency and terms of purchases.
- the level of the maximum and minimum price for which customers are willing to purchase your product;
- elasticity of supply and demand.
Many small companies that do business on the Internet track competitors and make manual price adjustments. This takes a lot of time of employees, whose duties include other tasks. In addition, the relevance of the received data is lost.
Automating the process of monitoring competitors in Price Control and implementing a dynamic pricing strategy will free up the time of your employees and save you from the daily routine of tracking and changing prices manually.
Worth remembering and checking.
For the right choice of competitors for price comparison, it is important to make sure that there are no contraband and counterfeit sellers among them. For this purpose, a control purchase is perfect.
When sites with an abnormally low price for your goods appear on the market, try to make a fictitious purchase. Order a copy, get it in your hands, inspect the product itself and related documents. If necessary, redeem the product and send it to the supplier for examination. Our service "Test purchase" can be of great help in this work.
All of the above has already pushed you to move to a new pricing strategy, but don't know where to start?
Follow these guidelines:
Set a business goal. Try to answer your questions: Do you want to increase profitability? profit level? What are your customers' expectations?
Your goals and objectives will guide you through the implementation of your dynamic pricing strategy.
Set pricing rules. Algorithms of dynamic pricing tools will work and produce effective solutions if certain rules are initially set. The rules can take into account the minimum, average and maximum price on the market, availability, set the markup percentage, etc.
Test and verify the effectiveness of your strategy. First you need to make sure that the rules have been set correctly. The Price Control dynamic pricing tool offers to upload the data to an Excel file and check if you are satisfied with the pricing decisions established according to your rules. If the result suits you, feel free to test your strategy in practice. Evaluate the achievement of the goal after some time. If the result does not satisfy you, the strategy can always be adjusted.