What Is Dynamic Pricing, and How Does It Affect E-commerce?

What is dynamic pricing?

Dynamic pricing is product pricing based on various external factors, including current market demand, the season, supply changes and price bounding. With dynamic pricing, product prices continuously adjust – sometimes in minutes – in response to real-time supply and demand. Amazon is one of the largest retailers that uses dynamic pricing. Its algorithms continuously adjust and evaluate prices.  

Dynamic pricing lends itself more to e-commerce than brick-and-mortar businesses. Since brick-and-mortar stores’ prices are more difficult to change, they tend to set prices that last for longer periods. In contrast, dynamic pricing relies on real-time trends and supply chain factors. For example, if stock for a particular product drops on an e-commerce site like Amazon, you’ll likely see a surge in the price within minutes. Walmart is another example of a major company that uses dynamic pricing to stay competitive.

What are the benefits of dynamic pricing?

If you’re selling online via an e-commerce store, it’s important to understand dynamic pricing and how it can benefit your business. 

1. Dynamic pricing gives you greater control over your pricing strategy.

A common argument against dynamic pricing is that it reduces your control over your products’ prices. In reality, it has the opposite effect. 

As a retailer using dynamic pricing, you’ll have access to real-time price trends across thousands of products in your industry. You’ll be able to see your competitors’ pricing changes and understand a product’s supply-and-demand levels. This information will help you set the right prices for various products and maximize your revenue. 

2. Dynamic pricing allows flexibility without compromising your brand value.

Many e-commerce retailers shy away from dynamic pricing because they fear it will damage their brand value and diminish the customer experience. After all, consumers can easily mistake your fluctuating product prices for manipulation or even fraud, right?

Wrong! You can protect – and even strengthen – your brand value by implementing dynamic pricing. You can set a price floor that reflects your brand value while gaining the flexibility to stay profitable. You can also use dynamic pricing as part of seasonal marketing strategies and promotional offers while remaining profitable, which can be challenging with a flat pricing model.

3. Dynamic pricing saves you money in the long run.

Dynamic pricing is based on real-time changes in supply and demand. It considers market price fluctuations and monitors competitor activity. You get the right data and information to set optimal product prices and stay profitable despite fluctuations.

You save money in the long run with dynamic pricing. Since web-based software and applications perform all calculations, there’s no need to spend time and labor (and therefore money) on manual calculations and related administrative activities. You’ll reduce overhead costs, adding to your ultimate profitability. 

4. You can manage dynamic pricing effectively with the right software.

Monitoring hundreds of thousands of products and watching real-time supply-and-demand trends is highly complex and challenging. It’s beyond the scope of most e-commerce businesses. However, the best e-commerce platforms and dynamic pricing solutions take away the guesswork, automating the process to provide accurate data you can use to set optimal product prices.

5. Dynamic pricing isn’t error-free, but you’re still in control.

Dynamic pricing is based on supply-and-demand changes. As with any technology-based forecast, there is potential for error in dynamic pricing algorithms. However, even if the proposed pricing is inaccurate, it’s still just a proposal. You remain in control and can review the pricing changes your application recommends.

Additionally, the experiences of companies like Amazon, Best Buy and Walmart indicate that potential errors are easily manageable and don’t significantly impact overall profits because the changes are so frequent.

E-commerce retailers are growing every year. As an online retailer with ever-increasing competition, you face the challenge of maximizing profits while keeping your prices competitive. Dynamic pricing is the ideal solution to this problem; it considers supply-and-demand changes to recommend optimal prices. If implemented for a sustained period, this pricing strategy can significantly boost your overall revenue and profitability.

What are the downsides of dynamic pricing?

Consider the following downsides of dynamic pricing. 

1. Dynamic pricing can lead to customer backlash and distrust.

While it’s tempting to sit back and leave the pricing to the algorithms, doing so can cause a customer revolt. For example, Bruce Springsteen allowed tickets for his 2023 tour to be handled by Ticketmaster’s dynamic pricing system. The Boss’s blue-collar, advocate-of-the-average-guy brand was seriously tarnished when mid-range seats went on sale for over $4,000 each. 

2. Poor data sources can impact dynamic pricing.

Since dynamic pricing is based on real-time data, the data must be as accurate as possible. Otherwise, you’ll end up with a “garbage in, garbage out” situation that can wreak havoc on your profitability and sales volume. Ensure the data going into your pricing system is as clean, current and accurate as possible. 

3. Dynamic pricing can alter customer behavior.

Once customers realize that prices change in response to specific factors, they may change their behavior accordingly. For example, they may hold off purchasing at peak times and delay until there is less demand. While this can negatively impact profitability, it can be helpful for cash flow.

4. Dynamic pricing may reduce customer loyalty.

If customers are confused or feel taken advantage of by fluctuating prices, they may opt to purchase from a competitor with fixed pricing. To minimize the possibility of diminished customer loyalty, ensure an excellent customer experience. Reduce friction on your e-commerce site to make purchasing easy, offer free or low shipping prices, and provide easy returns and exchanges with superior customer service. 

Dynamic pricing FAQ

Why is dynamic pricing important?

Dynamic pricing keeps you on top of the competition. With a price optimization software program, you can track your competitors in real time to evaluate trends and make decisions about pricing changes.

Dynamic pricing also gives you more control over your prices. Instead of watching and waiting to see if your products and services are priced effectively, you can change prices within minutes, with near-instantaneous results. Dynamic pricing can save money because you collect and use data to quickly make intuitive price changes.    

What is an example of dynamic pricing?

There are multiple dynamic pricing methods. Here are a few examples of how companies can change their prices flexibly:

• Peak dynamic pricing: Prices are higher during a product’s peak seasons. For example, if you sell swimsuits or pool supplies, you can charge more for them during the summer. You can also charge more for popular gifts during the holiday season.
• Segmented dynamic pricing: Segmented dynamic pricing is based on geography. For example, you could charge more for your products in areas with a higher annual cost of living (and higher-income customers).
• Market changes: Supply and demand can increase or decrease a product’s price. Naturally, you’d charge less for a product that you have in excess and more for a popular product that’s running low.

Is dynamic pricing legal?

Yes. Although price discrimination was made illegal by the Robinson-Patman Act of 1936, the federal courts and the Federal Trade Commission have upheld companies’ right to use dynamic pricing in most circumstances. The only illegal criteria for variable pricing are race, gender and sexual orientation, or cases considered to be anticompetitive. With all of the competition in e-commerce, your company is unlikely to fall into this category with dynamic pricing.

Is dynamic pricing fair?

All business is based on supply and demand; dynamic pricing allows you to fine-tune your pricing to match these market forces. Although a customer who pays more for the same product or service may feel you are treating them unfairly, customers always have the option of buying at a different time or buying from a different supplier. However, if you are the only provider of a critical product, like a vaccine, you should seriously reconsider using this strategy.

Should you tell customers about your dynamic pricing? 

In the age of hyperconnectivity, customers will likely share the price they paid for a product with others, causing the person who paid more to feel taken advantage of. That is why you should include a short statement on your website about how your prices may fluctuate based on various factors, including demand. This type of transparency in business can create a trusting relationship with your customer base and social followers that strengthens brand loyalty and avoids customer backlash.

How can you implement dynamic pricing?

Several dynamic pricing software solutions, including Omnia Retail, PriceEdge, Prisync and Intelligence Node, can handle this for you. Before selecting a platform, determine your goals. You may want to achieve a specific unit or dollar sales volume, maximize profits, or improve cash flow. Based on these goals, you will set pricing rules, telling the software how to behave in certain situations. For example, if a product has low demand, you can set its price to drop to a little less than that of competitors but not below a certain floor.