Dynamic pricing in real-time: Where online retail is headed

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What will be responsible for taking ecommerce as we know it to the next level? Many trends have taken e-commerce by storm lately, from omni-channel retail to social commerce, but the real answer can be found in the strategies that have made behemoths like Amazon and Best Buy so successful.

Dynamic Pricing

One of the strategies that these big-box retailers have in common is dynamic pricing. At its core, dynamic pricing allows prices to fluctuate based on external and internal factors in order to optimize for profit and sales. A key feature of this strategy is automation. Real-time price updates are what make dynamic pricing so effective for online retailers. After all, online businesses need to be competitive around the clock because they can’t put a “Sorry, we’re closed” sign on their homepage. Even momentary lags in price optimization can have a big impact.

Retailers that use a dynamic pricing strategy take into account external metrics, such as competitor pricing, conversion rates, traffic, and demand. Internal factors include sales goals, supply, brand image, and more. Retailers can use this data to cut or boost prices. While price cutting is a prominent way that Amazon, one of the most infamous loss leaders, uses dynamic pricing, not all businesses use it that way. Amazon is able to dynamically reprice every 10 minutes or so in order to consistently be the lowest price. It sacrifices profit in favor of extreme market share. However, this business model is unsustainable for most other companies.

There are many instances in which a price increase is in a company’s best interest. For example, when a competitor runs out of stock or when demand is high, a price increase can help boost profit margins. These price increases don’t need to be dramatic, because depending on sales volume, a small bump in price can significantly improve the bottom line.

Why Dynamic Pricing Matters

Dynamic pricing is necessary in online retail because shoppers are highly price sensitive and the market is hyper-competitive. The rise of mobile has made this even more true. Shoppers now have price comparison engines at their fingertips at all times through desktop, mobile sites, and apps. Therefore, retailers need to be aware of competitor pricing changes and have the ability to react in real-time. This gives them the opportunity to be competitive and, more importantly, remain profitable no matter what’s happening in the market.

How Price Elasticity Fits In

Price elasticity, or the effect that small price changes have on the demand for a given product, is a big part of dynamic pricing. Testing price elasticity is a great way to find the optimal price when introducing a new product to the market. Dynamic pricing makes it possible to A/B test the prices of products and based on that, online retailers can figure out the price elasticity for specific products.

Will dynamic pricing remain a strategy that only major retailers use or will other retailers catch on in the near future? Comment below or tweet @FutureCommrce.

Photo: Barry Blackburn / Shutterstock.com

Angelica Valentine
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October 23, 2014
Angelica Valentine

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