What Is The New Trend In Dynamic Pricing For E-Commerce Businesses 🔮
What is the new trend in dynamic pricing? As e-commerce improves, we see the use of dynamic pricing methodology changing too. For example, rather than solely changing prices in response to supply and demand, we are now seeing more dynamic pricing systems also varying prices according to a customer’s specific purchasing habits or ‘propensity to buy’ at a given time – under the banner of personalisation. Companies are now utilising individual data they collect from each customer, making sure they’re selling their goods and services at the highest price they know a customer is willing to pay.
The problem is though, this strategy could lead to a grudge purchase, reducing customer lifetime value if not implemented properly. Furthermore, we are seeing businesses employ this strategy without focusing on why customers buy. Instead, they charge based on a predictable willingness to spend without defining or understanding customers’ needs first.
In this article, we are going to discuss the new emerging personalised dynamic pricing approach in e-commerce.
We also assess the pros/benefits and cons/risks of using this pricing. Then, we give recommendations on how businesses can utilise it properly. We argue that knowing your customers well before relying on predictive data to determine prices is the key to profitable personalised dynamic pricing.
At Taylor Wells, we believe that personalised dynamic pricing is a continuous process that requires close supervision and updating. Only with the strong commercial capability to drive strategy and teams can this new pricing approach boost the profits of e-commerce businesses. By the end, you will know how to have the right data, technology, and strategy to enhance the performance of your company.
What Is The New Way E-Commerce Businesses Utilise Dynamic Pricing
The majority of us are familiar with dynamic or personalised pricing with airlines and hotels, but with the rise of online e-commerce, almost any product’s price could be dynamically priced. E-commerce businesses are certainly not being left behind when it comes to optimising their dynamic pricing practices, but before we get there, let’s define dynamic pricing.
What is dynamic pricing?
In simple terms, dynamic pricing is a method that employs flexible prices rather than fixed ones, which means that prices fluctuate in response to market changes. This includes elements such as demand, supply, time, and customer behaviour.
There are several reasons why business owners prefer it for their organisations. For example, dynamic pricing provides an excellent opportunity to increase sales. During periods of high demand, for example, it may be wise to raise prices in order to capitalise on sales opportunities and maximise profits. Lower prices, on the other hand, can sometimes stimulate sales and increase revenue. However, to know what to do to price your products appropriately you need to know how your customers buy, value and consume your products. Let’s take a look at how various types of businesses use dynamic pricing.
How do businesses typically use dynamic pricing?
Airlines
The traditional airline revenue management model is based on the dynamic pricing model. Airline prices are typically adjusted based on factors unrelated to the customer, such as competitor pricing, booking time, supply and demand. For example, an airline may adjust seat prices based on the type of seat, the number of available seats, and the time of the flight. Classical airline dynamic pricing does not consider who the customer is and presents the same price to every customer across the platform.
Hotels
Instead of always offering the same flat rate, dynamic pricing takes into account changes in demand for hotel businesses. Consequently, a hotel that uses dynamic pricing will charge higher rates when demand is high. On the other hand, once demand declines, rates will fall in an attempt to attract more customers. This popular hotel pricing strategy is used to increase revenue and achieve full occupancy (also referred to as yield management).
Restaurants
Even the restaurant industry, which typically has slim margins, is experimenting with dynamic pricing to see if it will work for them as well. Some raise their prices during peak hours, such as lunch and dinner, as well as on weekends. Then, during off-peak hours, they temporarily reduce the price of certain menu items to increase sales.
Concert Tickets
This year, Ticketmaster made headlines by implementing a contentious dynamic pricing approach for concert tickets. The Bruce Springsteen show, for example, was supposed to cost around $200 at first. But then Ticketmaster began to price based on demand, reaching a low of $2,695 and a high of $5,000 at one point. All of this is part of a variable pricing strategy that employs artificial intelligence to adjust prices in real time. Furthermore, it’s another way for an artist’s customer base to be segmented and price discriminated.
E-Commerce
According to Business Insider, 40% of the largest e-commerce companies, such as Amazon, change their prices every few minutes. The platform’s algorithm processes massive amounts of data, such as market trends, competitor pricing, purchasing behaviours, and so on. Thus, they can sell more products at the highest possible financial gain. The most common type of e-commerce dynamic pricing considers the relative value of products in comparison to the rest of the market. This pricing strategy enables businesses to respond to evolving market trends without requiring personal information from customers.
What is the new trend in dynamic pricing happening in E-Commerce?
The rise of online sales has broadened the opportunities for dynamic pricing. Prices on online platforms can change at any time. What’s more, rather than fluctuating in response to supply and demand, they can vary based on the customer’s specific purchasing habits. This is what we can refer to as personalised dynamic pricing based on customer data and willingness to pay.
Personalised dynamic pricing does not dismiss the traditional approach to dynamic pricing; rather, it adds a new layer to it by taking individual customer identity into account when setting prices. To illustrate, two customers who purchase the same item at the same time and under the same conditions may pay different amounts if purchasing data for one of them shows a higher willingness to spend.
So, for example, a person who has purchased Mac devices in recent years may be less price sensitive and therefore have a higher willingness to pay than a person who has only bought Windows PC products. Consequently, when these two customers are purchasing the same devices, the Mac user is presented with a higher price, while the Windows user is presented with a lower but still profitable price. This type of pricing is possible thanks to sophisticated predictive software and algorithms that incorporate willingness to pay. What are the pros and cons of this approach?
Discussion On The Advantages And Disadvantages Of Personalised Dynamic Incremental Pricing
Companies are moving closer to personalising their pricing strategies for each customer; moving ever more closer to controlling and boosting sales and revenue for short-term profitability.
Personalisation in e-commerce is gaining momentum.
Research shows that personalising websites, pricing and marketing properly can drive an average of 10 to 15 per cent additional revenue (with company-specific lift spanning 5 to 25 per cent depending on the sector and organisational ability to execute). With personalised dynamic pricing, a company can still close a deal with a customer who has a lower willingness to pay. As a result, more sales will be made. While some customers will pay more than others, the business will become more profitable.
It is also possible that customers will prefer personalisation. Companies will be able to customise their customers’ shopping experiences by using customer-level data, potentially leading to higher customer satisfaction. In fact, when conducting sales with a customer, hotel websites like Orbitz and automakers like Tesla employ personalised pricing to their benefit.
However, caution should be taken on setting dynamic prices for products without knowing why customers are buying.
The truth is that we are seeing e-commerce businesses utilising personalised dynamic pricing without knowing their customers’ buying motivations and value drivers. They instead charge based on a predictable willingness to spend without defining or understanding customers’ needs first. This could lead to a grudge purchase, reducing customer lifetime value.
Another issue is that personalised pricing may appear to be deceptive and unfair. Customers may object to the idea that someone else is receiving a better deal than them simply because they are willing to pay a different price. Furthermore, they may be uncomfortable with your company knowing about their individual shopping patterns. They may begin to change their purchasing habits, which will be detrimental to the business. If sellers do not use the pricing strategy correctly, they may face significant sales declines. So, how can online retailers improve their personalised dynamic pricing?
Customer Perception and Behaviour Regarding Dynamic Pricing
Understanding customer perception and behaviour is crucial when implementing dynamic pricing. Dynamic pricing adjusts prices based on market demand, competition, and other factors. So, as we have discussed, what is dynamic pricing? It is a flexible pricing strategy that changes in real time.
Customers often react to dynamic pricing in different ways. Some appreciate the potential for lower prices during off-peak times. Others may feel frustrated when prices fluctuate frequently. For instance, an airline ticket might cost less on a weekday but spike over the weekend. This pricing model can sometimes create a sense of urgency or fear of missing out.
Transparency plays a key role in customer acceptance. When businesses clearly explain why prices change, customers are more likely to understand and accept dynamic pricing. For example, ride-sharing companies often notify users about surge pricing during high-demand periods. This openness helps in managing customer expectations and reduces negative perceptions.
However, perceived fairness is also essential. If customers believe that dynamic pricing is unfair or arbitrary, they may lose trust in the business. For instance, a loyal customer might feel alienated if they notice that prices are significantly lower for new users. To mitigate this, businesses can offer loyalty programs or discounts to regular customers.
Moreover, dynamic pricing can influence purchasing behaviour. When customers know that prices may increase, they might buy sooner rather than later. Retailers often use this strategy during holiday sales, encouraging early purchases with limited-time discounts.
In essence, addressing customer concerns about what is dynamic pricing involves transparency, fairness, and communication. Businesses must balance the benefits of dynamic pricing with the need to maintain customer trust. Through understanding and addressing customer perceptions and behaviours, companies can implement dynamic pricing effectively and ethically.
Legal and Ethical Considerations and Future Trends in Dynamic Pricing
Understanding what is dynamic pricing involves more than just knowing the mechanics. Legal and ethical considerations play a significant role. Businesses must comply with laws to avoid penalties and protect their reputation. For example, price discrimination laws may restrict how prices change for different customers. Violating these laws can lead to fines and damage to a brand’s image.
Ethically, transparency is key. Customers should know why prices change and feel the system is fair. Lack of transparency can lead to dissatisfaction and loss of trust. For instance, if customers believe they are being charged more based on their browsing history, they might choose to shop elsewhere.
Moreover, businesses should avoid exploiting customers’ urgent needs. Raising prices excessively during emergencies, like natural disasters, can be seen as price gouging. This practice is often illegal and always unethical. Companies should aim to balance profitability with fairness.
Looking ahead, dynamic pricing will evolve with technology. Artificial intelligence (AI) and machine learning are transforming how prices are set. These technologies analyse real-time data to adjust prices more precisely. For example, an online retailer might use AI to change prices based on current demand and competitor prices.
The Internet of Things (IoT) will also impact dynamic pricing. IoT devices collect data on customer habits and preferences. This data allows businesses to offer more personalised pricing. For example, utility companies might use smart meters to charge different rates based on energy usage patterns.
As personalisation is gaining traction, customers now expect tailored experiences. Personalised pricing can meet this demand but must be done fairly. If customers feel pricing is too personalised, they might perceive it as unfair.
Implications
E-commerce businesses can properly utilise personalised dynamic pricing strategies by being customer-focused. Don’t hide the fact that you’re gathering customer data. Instead, construct it in a way that enhances your online platform. To avoid customer dissatisfaction and missed sales opportunities, you must know why customers buy in the first place. Define and understand customers’ needs. This should serve as the foundation for your algorithms.
Make your pricing not just about growing your profits but also a way to offer them more value and a better shopping experience. Depending on how it applies to your business, you can use data to incentivise customers based on their characteristics and actions.
One problem emerges when members of a company’s pricing team do not recognise the logic behind dynamic pricing’s mathematical algorithm and how it relates to the market. This will be a roadblock for your business. The best thing to do is to optimise the dynamic pricing system while keeping pricing and category teams in mind. Invest in providing them with the necessary skills to help you maintain your pricing power in an ever-changing e-commerce landscape.
Our findings show that when a business builds and embeds commercial capability across the business; bolstering its internal pricing skills and capabilities to build a sustainable pricing system, it can generate at least 3 – 10 per cent additional margin each year while protecting hard-earned revenue and volume. This is at least a 30 – 60 per cent profit improvement straight to the bottom line.
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Bottom Line
We started this article by discussing what dynamic pricing is and how different industries use it. Then, we highlighted recent e-commerce developments, particularly the use of personalised dynamic pricing. Firms are getting closer to tailoring pricing strategies to each individual customer. Although this is a good strategy for increasing short-term profitability, it can also lead to customer dissatisfaction.
Every e-commerce company is unique in its own way. When developing a pricing strategy that is appropriate for your customers and your business, there are numerous factors to consider. For some, personalised dynamic pricing may be the best strategy. Remember that this pricing approach has advantages and disadvantages. It is necessary to reap the maximum benefits while minimising risks. Work on strengthening your commercial capability and make customer-centric principles the foundation of your decisions.
For a comprehensive view on maximising growth in your company, Download a complimentary whitepaper on How To Drive B2B Pricing Strategy To Capture An Additional 2 to 10 per cent Margin Within 3 to 6 Months.
Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at team@taylorwells.com.au if you have any further questions.
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