The basic law of economics is supply and demand. When supplies are high and demand is low, so are prices. When supplies are low and demand is high, the price is too. With today’s algorithms it is now possible to determine the nature of the demand for a given item, as well as the potential supply, and set your pricing accordingly. This concept is known as demand pricing.
So, is dynamic pricing right for your ecommerce enterprise?
If you have a product everybody wants and they really can’t get it anywhere else, you can pretty much set your own price. Airlines routinely employ this strategy, which is why two passengers can be sitting side by side in a plane having paid two wildly different fares for their seats. In some cases, depending upon when they bought the ticket, a person enduring the indignities of a middle seat in coach can actually have paid more than someone blissfully sipping champagne in First Class on the exact same flight.
When you’re considering how to create an ecommerce site, dynamic pricing is one of the functionalities you’ll likely want to include. Highly successful retailers like Amazon and WalMart use it. In fact, Amazon’s prices fluctuate approximately every 10 minutes, while WalMart’s change some 50,000 times a month. In so doing, both companies have grown their sales by some 27 percent per annum.
The most commonly employed dynamic pricing strategies include:
While utility companies in particular are known for this, peak pricing can also be employed to take advantage of cultural shifts and events. Merchants can surf demand fluctuations, instituting higher prices when demand is up and lowering prices when demand wanes—or when their competitors have low inventory and raise their prices. When the Cubs won the World Series, demand for Cub-oriented merchandise was high. As the public’s attention shifted, Cubs gear became less popular. Retailers employing peak pricing strategies around these items lowered prices to clear out excess merchandise.
When an item is about to be superseded by a newer one, time-based pricing can be used to get rid of it. This is why the best time to buy a new car is at the end of its model year. When those shiny new 2018s roll out, the 2017s are suddenly less attractive. To get them to move, automakers will slap incentives on them to give consumers a reason to turn their heads away from the 2018s just long enough to clear the remaining stock of 2017s. This strategy can be employed by ecommerce merchants to, say, clear out last year’s flat-screens to make room for the new and improved models coming in this year.
Got an all-new product for which demand has yet to be established? This is good time to employ a penetration pricing strategy to reward early adopters willing to give it a try. Once they’ve bought into it enough to create a buzz, you can then raise the price to whatever level the market will support. Executed well, this strategy can serve to undercut your competition and increase your market share.
Chief among the many advantages of dynamic pricing is the flexibility it gives you in terms of your pricing structure, while simultaneously allowing you to maintain control of the value of a brand. You can set a floor below which the price will never fall. This way, if you have a good with a certain cachet attached to its pricing you can still offer shoppers a deal without cheapening the product. Dynamic pricing also ensures competitors don’t undercut you. All in all, it’s a good way to go. You just have to make sure your platform will support implementation of the strategy.