Dynamic Pricing: How To Use it to Increase Your Profit Margin

Estimated reading time: 6 minutes

Your company depends on your pricing decisions. Even the best product in the world won’t be able to survive bad pricing because pricing it too high means that no one will buy it and pricing it too low means that you lose money.

It impacts your business by affecting your customer’s purchasing decision and it dictates how much you’ll earn. Pricing is the main factor in purchasing decisions for many people – and no amount of great marketing can make up for bad pricing.

You need to find that spot where your product is affordable and you still have money to make.

What is dynamic pricing?

This is the process of setting prices and changing them over time based on several factors and trends as well as predictions. These factors are:

• Standards in the industry – average pricing 
• Conditions in the market – supply and demand
• Expectations from consumers – how much they want to pay

So, it means combining all of these factors and coming up with a price that satisfies them all. And subtlety is the key here.

How does dynamic pricing work?

You can see dynamic pricing everywhere. For instance, sweets used to cost a lot less when you were a kid. Now they are more expensive because of inflation. When you visit a stadium to watch a sports game, you can’t bring food so people there control the pricing and food costs more. Gas prices also fluctuate all the time.

It requires you to keep track of a lot of data and collect information about stakeholders in your industry. This is done through analytics software but you have to understand what you need the most on your own.

This process involves work from both machines and humans. But the process is never the same.

What are the benefits of dynamic pricing?

The main benefit of dynamic pricing is the fact that you are maximizing profit margins and sales. But, here are some more benefits:

• You’ll always remain competitive with your pricing, thus staying ahead
• It’s easy to optimize your prices 
• It gives you a lot of data to learn from

Mistakes of dynamic pricing to avoid

While there are many benefits to dynamic pricing, there are also many mistakes you could be making. 

Here they are:

• Setting the price and then forgetting all about it or letting the computer do all the work
• Changing the prices too often
• Undercutting your competition and causing a price war

Starting with dynamic pricing 

The main components of dynamic pricing are software, data, and humans.

Software

Your software needs to be comprehensive, intelligent and thorough. It should allow you to collect data easily and quickly as needed. It should translate data points into something you can understand and be able to use this information to make predictions in the future. It should be easy to use and appropriate for your budget.

Data

“You need to work based on data that comes from different sources. You need to look at industry averages, consumers and so on but also look within your own company. Make specific goals when it comes to margin and revenue as well as growth and then also base your pricing on that,”says Timmy Robinson, an event manager at Paperfellows and Oxessays.

People

The automation works but you also need manpower to be there. You need humans to define what your software will do and then they need to take the processed data and make a decision. Of course, they also need to monitor everything to make sure it’s working properly.

What to do and what not to do

By taking the right approach you can guarantee success for your e-commerce business. So, here are some general rules on implementing dynamic pricing.

• Consider the standards in your industry but don’t be a follower in setting your prices
• Be flexible with dynamic pricing but don’t compromise on your goals
• Take opportunities but don’t take advantage of your customers.

How to implement dynamic pricing 

Implementing dynamic pricing doesn’t happen overnight. It would create chaos in your company and it would disturb your team members. It would also be noticeable for your customers and they might give up on you. 

So, here is how you should implement the dynamic pricing strategy:

Start with initial pricing 

“This is simple and straightforward – you should use what you know to set prices. It’s possible to have some success with this strategy, especially when you are new but it should be clear that this is not the final destination. Even successful companies with this strategy are not that successful.,”says Ellie Biles, an event planner at State Of Writing and UKWritings.

Have a loyalty program

Subtlety is really important so a way to introduce dynamic pricing is to start with a loyalty program which allows you to segment your market to implement different prices for each tier. This is subtle and it will not disturb your customer base too much.

Demand pricing

This is the next level of pricing – the demand pricing where you take all of the previous points and implement them with relevant data about demand into the mix. This uses the prices as balance and then increases or decreases the prices based on demand. The problem with this that it’s not truly flexible. The fluctuations are often just temporary.

Perception pricing

Now, with demand pricing, you have a customer perspective in mind but only on the surface. Now, you are supposed to take your customers further into consideration and ask how much they are willing to pay. This is where it gets granular and you are considering more factors. You are considering value, consumer’s ability to afford the products, willingness to pay more and competition.

Competition pricing

Industry averages are used with initial pricing strategy but this is more than that. While this is a tricky one because you don’t want to be more expensive but you also don’t want to start a price war. So, you need to incorporate this strategy with another strategy to create a nice mix that works.

Holistic pricing

There is not one single real price for anything in the world. The only real price is what someone is willing to pay for it and there is an infinite number of options and factors related to that. From their own preferences to the current state to industry averages and so on. You aren’t expected to know all of this and actually consider it.

Dynamic pricing with its holistic approach means that you accept you never know everything and that you always need to optimize your pricing based on continuous learning and improving.

Conclusion

So, your ultimate goal is to implement dynamic pricing and continue always learning more about it, your industry and customers. Stay focused on your goals.