Dynamic pricing software: definition, pros and cons

Dynamic Pricing Engine Is the Ultimate Tool for Retailers

Retailers, be they online or brick-and-mortar, tend to lose potential profits by failing to sell products at an optimal price at the right time. They often lack quality competitive and consumer data or are unable to use it efficiently. A dynamic pricing engine eliminates the problem.

Nelia Tiuriaieva

Dynamic pricing solution

What is a dynamic pricing engine? It is a type of software which aggregates real-time market data and helps retailers immediately set competitive prices for each shopper by constantly offering an optimal price based on a competitor’s actions, customer behavior, and purchasing power.

The dynamic pricing engine typically has five modules:

  • Long-tail module helps retailers set the optimal initial price based on the results of smart product matching
  • Elasticity module calculates how the price influences the demand
  • KVI module shows how every product contributes to the consumer price perception
  • Competitive-response module suggests price changes based on up-to-the-minute data about competitive prices
  • Omnichannel module allows managing both online and offline channels

What are the advantages and disadvantages of the dynamic pricing engine? How can one maximize the benefits? What are the ways to handle the drawbacks?



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How Businesses Benefit from Dynamic Pricing

According to McKinsey, retailers tend to reprice top-selling products three-four times per day, sometimes up to 12 times daily.

To make profitable pricing decisions, retailers require high-quality, accurate and timely delivered data about the market, including competitors’ stock, prices, promotional activities, and customer data from a variety of channels, as well as the means to analyze it and transform into a winning pricing strategy.

If the data is outdated, incomplete or inaccurate, pricing decisions will be detrimental to businesses. Thus, before switching to Competera, one of the company’s current clients sold as many as 1,170 out of 13,000 SKU products at the wrong price due to 9% of data errors.

The dynamic pricing engine constantly provides the necessary data on a schedule, and thus helps businesses set competitive prices. Besides, the program outputs real-time revenue stats enabling retailers to fine-tune their selling decisions on the go.

Armed with the optimized pricing strategy, competitive and customer data, retailers see their ROI surge and competition lag behind.

When it comes to customers, the dynamic pricing engine helps retailers to provide the most price-sensitive buyers with personalized offers.

Also, the dynamic pricing engine practically eliminates manual labor, bringing the risk of a human error to zero. On the other end, freed from mundane tasks of data collecting, Pricing and Category Managers focus on strategic goals.

Today dynamic pricing is among the top five investment areas for both large and mid-size retailers. With an effective solution, businesses claim to experience a 2%-5% sales growth and a 5%-10% margin increase.


How to Handle the Drawbacks of Dynamic Pricing Engine

Making the first steps in using the software, retailers may face strong customer dissatisfaction with the two side effects of dynamic pricing: price discrimination, as well as constant and irritating price changes.

In addition, there is a risk of customers switching to competitors in the search of a better offer, since it is easy to compare the prices of a specific product or service online.

Retailers can easily tackle all these issues by revamping their approaches: by using price personalization instead of discrimination, retargeting lost customers and fully integrating the dynamic pricing engine into their daily operations, making it part of the system.


Conclusions

The dynamic pricing engine is essential for retailers to compete in today’s market. It delivers accurate competitive and customer data on schedule allowing retailers to optimize prices, fuel sales and thus significantly increase revenues.

Although there is the risk of the software decreasing customer loyalty, there are several ways (price personalization, retargeting and the full integration of the engine into the retailer’s operations) to ensure it does not happen.


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