What is Dynamic Pricing and Why Is it Important? Strategy, Tactics and Benefits

Picture this:

You’re closely monitoring your e-commerce store's performance in skin care products.

Suddenly, a concerning trend emerges—a decline in customer engagement and sales, despite your best pricing efforts.

Intrigued, you start to analyze your competitors' pricing strategies and make a surprising discovery:

Your competitors constantly adjust their prices, skillfully luring your customers away with the best offers.

It's a cut-throat pricing battleground, leaving you at a disadvantage.

Determined to make a change, you explore dynamic pricing—a strategy that adjusts prices in real-time based on market conditions and customer demand.

And then you discover its potential:

Retail sales growth of 2-5% and increased profit margins by up to 10%.

It’s an opportunity you just can't ignore.
In this blog post, we’ll explain what dynamic pricing is, take a look at the main types, the benefits of implementing dynamic pricing, and lastly: How to execute the strategy itself.

Table of contents:

• What is dynamic pricing?
• Static pricing vs. dynamic pricing
• Three main types of dynamic pricing
• Benefits of dynamic pricing
• How to execute dynamic pricing

What is dynamic pricing?

A dynamic pricing strategy is when companies are able to change their prices rapidly in response to changing customer demand.

That means that product managers can simply adjust their prices multiple times a day, week or month -  in order to stay competitive in the high-paced market.

Let’s take an example from the online retail industry:

When your customers are contemplating on whether they should buy a product or not, a few factors come into play. Factors like:

• How available the product is
• How popular it is and
• The most specific trends in the market

So how can e-commerce managers respond to these constant and consistent changes in the market?

And at the same time gaining some sort of understanding for how much demand there is for their product?

That’s where dynamic pricing comes in, which helps e-commerce companies make sure that their pricing better correlates with their customers' most current preferences.

Static pricing vs. dynamic pricing

Static pricing is when you keep a single price point at all times.

Say you’re looking for a new smartphone, and you see that all the retailers are selling it at the exact same prices, no matter the time or day in which you’re browsing.

In this type of pricing model, you’ll typically base your prices on intuition or historical data - taking into account the current market conditions, of course.

But with dynamic pricing, you’re flexible to change your prices based on demand and market conditions.

So if you’re selling tickets to a flight, you can increase your prices the closer you get to the departure date.

In other words, prices change automatically over days, weeks, months - all in response to customer demand.

Three main types of dynamic pricing

We can categorize dynamic pricing into three main categories: Seasonal pricing, time-based pricing and differentiated pricing.

1. Seasonal pricing

Seasonal pricing, also known as peak pricing, is most often used by the hospitality and transportation industries.

In this case, they alter their prices based on how the demand is constantly changing during specific seasons or months.

Here’s two examples: Flash sale events and Cyber Monday pricing.

In the first scenario, online retailers can offer time-limited discounts and special offers - with the intention of creating some sense of urgency amongst their most avid customers.

Amongst these kinds of events, prices of certain products (like a pair of jeans) are reduced within a specific time frame. The goal is to hopefully entice customers to make a quick purchasing decision to buy the pair of jeans before the sale closes.

In the latter example, an online retail brand uses the Monday after Thanksgiving (AKA Cyber Monday) to offer significant promotions and discounts in order to attract customers.

Here’s an example from Cyber Monday in 2016, which saw more price changes from large retailers like Best Buy, Walmart and Amazon, all in the span of one week:

2. Time-based pricing

The second type of dynamic pricing is called time-based pricing.

This strategy means you adjust your prices based on changes in supply or demand at specific times.

What's the aim here? Enticing customers to make more rapid purchasing decisions.

Here’s three examples of time-based pricing:

• Limited-time coupon codes: This is when e-commerce stores give customers exclusive coupon codes that are only valid for a specific period of time. The goal? To encourage customers to buy something fast, and only within that time frame.
• Abandoned cart recovery offers: This is another tactic where companies can send automated emails to customers that haven’t gone through with their purchase, ie., abandoning their cart. With that email they’ll offer time-limited discounts with the aim of encouraging costumes to actually complete their purchase.
• Pre-order discounts: Online stores can offer discounts for those customers who order products before their actual release date. This can help entice customers to reserve products early and generate some form of excitement.

On the note of abandoned cart recovery codes: They're worth testing for your business.
In fact, abandoned cart emails have even demonstrated to influence customers to stop abandoning their cart and boost sales:

3. Differentiated pricing

Third, we have differentiated pricing.

Also known as segmented pricing, this type of dynamic pricing entails setting more than one price for the same product - taking into account the value amongst different segments of your customer base.

Two examples of different pricing are product bundling and membership levels.

In the first example, e-commerce retailers can create product bundles (where several products are put together at a discount). This taps into different segments as it can cater to customers that have different budgets or want different products, which gives them more flexibility.

In the second example, membership levels entail when companies set different levels to their service or product with varying pricing based on the membership tiers.

The more benefits or features, the more you have to pay, or vice versa.

Quick tip: If you choose to complement this type of pricing, make sure you take into account location-based factors, customer demographics and the nature of the product being offered.

That way you make sure that your pricing actually aligns with what your customers prefer plus the dynamics of your market.

Benefits of dynamic pricing

So what are the advantages of implementing dynamic pricing?

We’ve outlined three below.

1. You become more competitive

One of the biggest benefits of dynamic pricing is how quickly you’re able to adapt to market changes - being able to swiftly adjust your prices.

It leads to pricing decisions that are a whole lot more accurate - and which increases your chances of outperforming your competition.

For example, a retailer online has become aware of some products that are currently trending and analyzes the demand for these products.

In order to attract more customers, the retailer can adjust their pricing and inventory accordingly, meaning that they actually have these popular products in stock and have the best prices for them as well.

2. Increase profitability

A second huge benefit of dynamic pricing is its direct impact on your company’s profitability.

A study found that having more than one price can boost revenue potential while all costs and the number of customers stay the same:

With this type of strategy, you can easily find the products that perform both satisfactory and unsatisfactory, which helps you focus more on increasing sales and your bottom line.

You’ll also identify which products customers aren’t all that sensitive to in terms of pricing, which helps you set steeper prices without directly affecting the general demand.

Plus, dynamic pricing can help increase how willing customers are to pay - as you set up pricing that is more in line with the considered value of what you’re offering.

3. Enhance Key Performance Indicators (KPIs)

Third, a big benefit of dynamic pricing is its ability to enhance key performance indicators (KPIs).

How?

Because that way you set a well-defined pricing plan which supports your KPIs and is in line with your business goals.

Dynamic pricing means using accessible data to understand more about how your customers are purchasing, as well as trends within your specific market.

This enables more accurate pricing decisions that are inherently data-driven.

4 steps to implement dynamic pricing

Now that you know the different types of dynamic pricing, plus its benefits, what’s next?

Here’s four steps to get started with this strategy.

1. Determine your business goal(s)

One of the most crucial steps is by identifying your business goals.

These goals will then serve as a kind of roadmap for all your future pricing decisions.

Our tip is to reflect on what your customers expect, if you want to prioritize overall profit or increased sales, or how you currently set your prices (and what impact that has on your bottom line).

2. Create a pricing plan

The next step is to choose your pricing strategy, which you only can do if you’ve decided on your business goals.

Maybe your goal is to increase overall sales. And let’s say you’re overseeing an online store that sells handmade crafts.

Choosing dynamic pricing could be the most effective strategy as you can adjust your prices based on how popular some crafts are over others - or you can quickly raise your prices after you see what your competitors are charging.

3. Set up pricing guidelines

The third, and maybe one of the most important steps, is to set up some pricing rules.

Because here’s the thing:

Even though the prices of your products may fluctuate, the rules (ie. guidelines) should remain consistent.

Some rules could entail that you adjust your prices based on current seasons or days of the year, or that if a product doesn’t perform all too well, that you decrease the price as a result.

It’s also important that you decide on which products will be a part of your new dynamic pricing strategy.

Having specific pricing rules in place can be a great way to increase consistency amongst your pricing team and all those involved.

"One common mistake e-commerce stores make is to implement static pricing rules solely based on cost or competitor pricing strategies. Pricing strategies need to be adaptable and adjust to changing market conditions. Regular evaluation and monitoring of pricing rules are necessary to ensure that they remain up to date and aligned with business objectives."

Robin Frugaard

Chief Commercial Officer

4. Choose the right pricing optimization software

Lastly, it's crucial to choose the right pricing optimization platform.

As dynamic pricing gains traction in the e-commerce world, the global market for pricing optimization software is projected to reach a staggering $2.43 billion by 2027.

Take Reprice, for example. A software that is designed for Nordic e-commerce companies that want to profitably scale pricing revenue.

And that wants to successfully implement a dynamic pricing strategy.

Here’s how:

Reprice gives you the power to manually or automatically adjust the prices of your products based on specific rules (pricing guidelines) you set.

For example, you can establish rules based on aspects like “brand”, “category” or “tag” for any products defined in the pricing rule. You can also choose criterias such as “follow competitor X”, “minimum margin” or “decrease and increase price” to define your pricing rule.

Plus, the platform makes it easy to benchmark competitors, update bulk pricing for specific brands or products, and automate pricing updates across all channels.

Right at the moment when you see those sudden changes in the market (and what your customers are preferring) that make it sense to adjust your prices accordingly.

And by automating pricing based on your own specifically chosen rules, you’ll be able to easily transition to a more proactive pricing strategy.

Which ultimately leads to higher margins and increased revenue.

Another way Reprice makes implementing a dynamic pricing strategy is by giving you daily price recommendations based on current market trends. This allows you to stay constantly agile in a fast-paced environment you’re already far too familiar with.

Conclusion

Dynamic pricing is all about paying attention to your surroundings.

In other words: Being able to quickly adjust your pricing depending on your current market conditions and the demand from your customers.

The benefits include being more competitive, enhancing your KPIs and increasing the level of profitability.

Implementing pricing optimization software like Reprice is a great way to kickstart your dynamic pricing journey, as you can easily:

• Change pricing manually or automatically based on rules you set
• Benchmark competitors and get a more comprehensive overview of your market
• Automate pricing updates across all relevant channels

Ready to get started with Reprice and dynamic pricing?

Book a demo here.