What is dynamic pricing: simple explanation

What is dynamic pricing?

Retailers, hotels, airlines, as well as UBER and Amazon have been experimenting with dynamic pricing for a long time, which helps them set the right prices for goods at just the right time.

Dynamic pricing is a pricing approach based on a flexible change in pricing strategies and tactics depending on various events on the market (prices, stocks, availability of goods at competitors’ shops), historical data (sales of goods at different periods), and retailer goals (profit, market share, the withdrawal of a new product, the sale of balances from a stock).

Without dynamic pricing, the retailer is vulnerable to the actions of competitors, more susceptible to the influence of the human factor and erroneous decisions, especially if he works in highly competitive industries.

Effective dynamic pricing is a system where pricing models, tactics, strategies and price management tools interact.

Dynamic pricing system

If we imagine the system of dynamic pricing as a scheme, it will include several elements:

Dynamic pricing

Key elements of the dynamic pricing system:

  1. Analysis of the market, strategies and activities of competitors
  2. Choice of the pricing models and tactics based on this analysis and global business strategy of the retailer
  3. Setting prices for goods
  4. Analysis of sales and further optimization of models and tactics

All elements of the dynamic pricing actively interact with each other and vary depending on the changes in initial data.

Choice of dynamic pricing models

Depending on the industry, product, target audience and period, the retailer chooses the currently appropriate dynamic pricing model (or the price change principle).

Such a model can be based on:

  1. Assortment (for example, if the goods at competitors’ stores are over, you can raise prices at your shop to earn more).
  2. Customer (set a price, based on a buyer’s profile and purchase history).
  3. Competitors (investigate the competitors’ prices and choose the price which is optimal for you).
  4. Sales history (study the sales history, develop patterns and use these algorithms for repricing).
  5. Combinations of all four of the above models.

Learn more about the benefits of dynamic pricing with the Competera Pricing Platform

Tactics and strategies for dynamic pricing

The pricing strategy is a predefined plan for the repricing of goods, which takes into account the overall business strategy.

An ideal pricing strategy doesn’t exist. Each retailer needs to consider both customer demand, pricing policies of competitors, and the level of competition in general when choosing the strategies that are appropriate at the moment.

After choosing a dynamic pricing strategy, you need to select a set of tactics that will make this strategy achievable.

Tools for setting prices and analyzing the effectiveness of dynamic pricing.

A simple Excel table may serve as a dynamic pricing tool, as well as a special software that monitors the prices of competitors, fills in the reports with sales data and applies tactics and repricing scenarios. Such a program helps the category manager administer pricing avoiding mistakes.

It also helps analyze the effectiveness of strategies and tactics of dynamic pricing: to explore how different scenarios work, compare them among each other, and verify forecasts.

Dynamic pricing allows business to be flexible and adapt quickly to changes in the market or within the company. According to Forrester Research, dynamic pricing increases the company's profit by 25%. In order to make it work, it is necessary to develop a system that takes into account the company's business and price strategies. The models and tactics chosen for the dynamic pricing system should be based on market analysis. The results of dynamic pricing need to be constantly analyzed, the models and tactics should be adjusted.

To learn more about dynamic pricing, read our article “How e-commerce retail can choose the products for dynamic repricing?”.