December 6, 2023
2023 can be dubbed the year of dynamic pricing. It first gained attention in summer when Stonegate pubs publicized the term. In November Halfords introduced dynamic pricing in a very unexpected environment of its workshops. If you’re curious about what all the fuss is about and how it might benefit your company, here’s a comprehensive overview of the concept, its various types, and the expected outcomes.
Dynamic pricing, also sometimes called surge pricing, refers to the process of adjusting prices based on factors that constantly change. It can be time: when you adjust your prices to certain hours. It can be shoppers’ activity: for example, there’ve been rumours that some airplane tickets companies change the prices consumer sees depending on how many times they have done a search for a certain destination. In any case, with dynamic pricing your prices change based on some external conditions — contrary to traditional fixed pricing, where prices remain constant, or change based on the internal conditions (for example, when you decide to run a promo).
With dynamic pricing, businesses can swiftly adapt to market fluctuations and optimise revenue as well as their profit margin. Dynamic pricing can also be aimed at achieving a higher level of personalisation and delivering a better experience to the customer. In 2023 for some businesses, like Halfords, dynamic pricing also became a part of their competitive differentiation. Like every pioneer in the field, they have been using this narrative to deliver the message: “We love our customers, we’re eager to go an extra mile to offer them better prices".
In 2023 for some businesses, like Halfords, dynamic pricing also became a part of their competitive differentiation.
At its core, dynamic pricing capitalises on the principles of supply and demand. When demand is high, prices increase. Conversely, when demand is low, prices decrease. The concept extends beyond just simple economics - it also considers
Businesses can set intertemporal rules (time-related rules) to manage pricing dynamically. For example, they can offer lower prices at certain times of the day, during specific seasons, or after the item has been in stock for X number of days. Think of Uber fares: you have to pay twice as much for a ride during peak hours.
Benefits of time-based dynamic pricing
The research conducted in 2020 shows that time-based dynamic pricing can increase demand by as much as 20% during off-peak hours, therefore significantly increasing company’s revenue (up to 42%)
Without question, this is the most popular type of dynamic pricing, especially in retail. Monitoring and responding to competitor prices is a must in today's highly competitive world. The first thing that every eCommerce business should do is to consider the possibility of setting their prices relative to competitors'. The goal isn't always to make them lower, but to leverage hidden opportunities. For example, let's say your position in the market is #2. Why should you price your product 20 pounds less than the competitor who holds the #3 position? Couldn't you narrow that gap and offer a price that is, say, 2 pounds less? You'll still be #2, but you'll earn an additional 18 pounds from every item sold. To do this, you need to use a specialised software that can adjust your prices dynamically, like Aimondo.
Read more on competition-based pricing here.
Multiple case studies and our own experience with eCommerce customers show that 21% increase in profit margin and 46-68% increase in revenue is very much achievable.
This type of pricing is more advanced than simple time-based on competition-based. However, it is also very much programmable, as it is based on the idea that your prices changes when a certain event happens. In time-based pricing you change prices following the ticking of the clock. In competitor-based pricing you change prices following your competitors’ moves. In segment-based pricing you change prices following the way you group your customers.
You can refer to a more detailed article on customer segmentation in eCommerce here. However, this is a short outline of the idea: your customers can be attributed to a certain segment based on their purchase history and the analysis you’ve made.
Age groups, locations, roles or behaviour. For example, shoppers who collected a certain number of scores within your loyalty program. They have purchased more than $10K from you. Or they have written >50 reviews on your products. They are entitled to a different tier of prices than everyone else. Used by companies: Shein (review-based prices), cinemas (age-based prices), Figma (offers special fees for educational institutions), Toom (Purchase power parity based prices where different regions of the country get different pricing tiers)
Designed based on your analysis of a person’s purchase history and after comparing it with other shoppers you have attributed this person to a segment that you call “likely to be pregnant” and consistently offer them a discount on baby formulas and diapers because they are more likely to make this purchase. Used by: Amazon (recommendations and emails).
B2B pricing is very often segment-based. If you’re serious about your quotes, you analyse seller's commitment to certain marketing activities, order size, history of interaction, then attribute them to a certain segment with associated predicted life-time-value, and offer them a distinct price for your goods that is different for all other segments. Used by companies: Michelin, Unilever.
Benefits of segment-based dynamic pricing are easy to project. If you target different segments and have multiple price points the chances of achieving better sales results are much higher. The increase in revenue can reach 85-90%.
In our practice, most retail companies that are serious about their pricing, use not one type of dynamic pricing strategy but a combination of them.
First, you have to decide what you want to achieve with dynamic pricing. It could be anything from increasing sales velocity and clearing old stock, to maximising profits on fast-moving items. Your goals might change in 3-6 months, but it’s important to understand what your primary needs are and how success would look like.
You probably already know all your competitors. But just to be certain you’re not missing anyone, perform a thorough analysis of your market once again. Who sells the same brands? Who is perceived as your competitor by your customers?
Ensure you have a good grasp of your cost structure. This includes both your variable and fixed costs related to the product. The aim is to make sure your dynamic prices will cover costs and ensure profitability.
This might seem like the least important thing on your list, but it might actually be the most important one. Think of it this way: your vendor will be your ship. If you choose a cruise liner to cross a local pond, you’ll overspend, and you'll feel that the space is too crowded and the captain of the big boat doesn't understand your needs. If you choose a tiny boat to cross the Atlantic — well, I don’t envy your fate. There should be a Task-Product-Fit (TPF). There are affordable solutions that you can use while selling on marketplaces (Amazon Repricer, Express Repricer, etc.). And there are complex, more elaborate tools that will require some effort from your tech team to arrange an integration with your ERP system. Because — let's be honest — you can’t call a manual price change performed by your managers once a month "dynamic pricing". Dynamic pricing is always automated — hence, the need to integrate dynamic pricing into your systems.
As soon as the integration is in place, you have to build your dynamic pricing strategy. Choose from one of the types described above.
In the tech world, POC (proof of concept) is the beginning of all projects. It means that you have to start with a limited number of items (up to 10K), instead of connecting all your assortment to your new dynamic pricing environment. A self-respecting vendor would offer you this option anyway. During the POC phase, you will have to track and analyse data meticulously, fix inconsistencies, and improve your strategies.
Make sure you have access to all necessary data: on-page bounce rate, engagement rate, conversions, the number and tone of reviews, etc. You will have to monitor all these data during the POC period to see how price changes impact your customer behaviour, your sales, and your profit margin (if this is what you’re after).
Based on the data you've collected, make necessary changes to your pricing strategies. Roll out the improved strategy on other categories.
Ana is a rare breed: T-shaped marketer with a wide experience in eCommerce, B2B, B2C and B2B2B marketing. Writes about unconventional strategies for exceptional growth.
Step-by-step guide on maintaining high profitability in retail.