4 Ways Dynamic Pricing Can Help Online Merchants Be More Profitable

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This strategy takes care of the heavy lifting of right-pricing inventory.

Have you ever saved or left something in your online shopping cart and, days or weeks later, received a notification that the price of that item has changed? This is an example of dynamic pricing. It’s a common pricing strategy in many industries including, for example, hospitality, ride-sharing, event ticketing, and real estate. E-commerce businesses are using this strategy more and more today–and for good reason.

Simply put, dynamic pricing is a strategy in which the price of an item is constantly and automatically adjusted in response to real-time changing demand. Essentially, this model allows online merchants to constantly change the price of products based on key factors, such as consumer behavior, seasonality, inventory levels, and various market conditions.

A dynamic pricing model is not appropriate for every industry or every business. One key requirement is that you operate in a space where there is a tolerance for pricing fluctuations–for example, apparel or cosmetics. If you do determine that this approach fits your business model, the next logical question is, how can it benefit your e-commerce business?

1. It can save you money

I don’t know about you, but I don’t know any e-commerce business with the time or resources to manually monitor the prices of all the products in their category internet-wide, let alone real-time supply and demand trends. Dynamic pricing calculations are done using Web-based software and applications, so that time, labor, and money can be allocated elsewhere.

Do a search for “Dynamic Pricing Software,” and you’ll find no shortage of resources. Try pairing that search with keywords specific to your industry, and you’re likely to find more tailored tools.

2. It allows you to be more strategic with your pricing

Using dynamic pricing gives retailers access to real-time price trends. Having visibility into the pricing changes of your competitors gives you even more insight into the supply and demand of individual products, better positioning you to set the right prices at any given moment and maximize revenue regardless of fluctuations.

Further, being able to see how consumers respond to these automatic price adjustments provides companies with a richer understanding of their target markets and audiences, which can be used in future pricing strategy planning.

3. It creates earning opportunities when demand is low

When demand is low, sales generally follow suit. There’s not much you can do about seasonality and other variables that commonly contribute to demand, but with dynamic pricing, you can take steps to make the most of those lulls.

With any dynamic pricing strategy, you must create pricing rules. Setting a rule that reduces pricing on certain products during periods of lower demand may open you up to new customers. And once you’ve driven trial, there’s always the potential that those new customers will become returning customers, so you’re supporting short-term and long-term profit strategies.

4. It can solve your inventory issues

These AI-based tools don’t do all the work, but they do a lot of it. It’s up to companies to define a commercial objective, build a pricing strategy, choose a pricing method, and establish pricing rules. The software then goes to work, combining internal and competitive pricing with inventory data to determine intuitive pricing.

Poor inventory management is one of the leading causes of profit loss, and it’s been a problem for more companies than not in the past year due to supply-chain issues. Because dynamic pricing tools monitor stock levels, you can use them to upsell or move more products. Contrary to lowering prices to track low demand, during times of expected high demand, you can increase prices based on stock levels relative to competitive inventory.

Every pricing strategy has one main objective: profit. Dynamic pricing is no different; it aims to maximize profit via time-based opportunity, creating feelings of scarcity and opportunity to motivate purchase. What companies love about it is that it does the heavy lifting to figure out what consumers are willing to pay for your goods online at any point in time.