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Dynamic Pricing: How It Works And Its Impact On Shopify Ecommerce Businesses

A bar chart showing the number of people using the internet for ecommerce in the United States in 2018.

Dynamic pricing has been around for many years, but it has become increasingly relevant for companies that operate in the e-commerce space today.

To put it another way, dynamic pricing is a pricing strategy in which the prices of products are regularly adjusted, often within a matter of minutes, in reaction to the supply and demand of the product in real time. Amazon, one of the principal merchants, is one of the first to embrace dynamic pricing and adjusts its prices every ten minutes.

Statista estimates that in 2026, global retail e-commerce sales will reach around 8.1 trillion U.S. dollars. 

The use of dynamic pricing techniques is undergoing several shifts as a direct result of the development of e-commerce. For instance, rather than solely adjusting prices in response to changes in supply and demand, more dynamic pricing systems are now also adjusting prices following a customer’s specific purchasing habits or ‘propensity/intent to buy’ at a given time under the guise of personalization. 

How does the process of dynamic pricing work for online retailers?

Dynamic pricing is calculated algorithmically using machine learning equations that continually improve themselves. These algorithms take into consideration a wide variety of factors that are relevant to price optimization.

Steps involved in dynamic pricing:

Collecting customer and pricing data

You will need to collect the appropriate data to get dynamic pricing up and running. Data that might be helpful include pricing offered by rivals, information on internal sales, weather forecasts, price promotions’ impacts, and other pertinent elements. It is essential to have accurate data to implement dynamic pricing. Thus it is in your best interest to gather all the necessary information. This is very important to consider before deciding on a specific pricing plan.

Determine the dynamic pricing strategy you want to use

The most effective dynamic pricing strategy is in conjunction with another pricing approach. You can decide on the data that should be included in the price model based on this alternative pricing method. For instance, you will want data on your expenses to implement a dynamic cost-plus pricing strategy. Still, to implement an active competitive pricing strategy, you would require data on the price of your rivals. If you want to combine various pricing strategies, you need to have the appropriate data access; otherwise, the dynamic pricing won’t operate effectively. 

Implement intelligent algorithms and AI–pricing software.

After selecting your particular pricing plan, smart algorithms and AI models will be implemented into the data to analyze it and improve margin and revenue. The more accurate the models are, the more reliable the recommendations for improving profit margins and payment will be.

Utilize price guidance

Following that, the model will propose a new price for the product. The recommendation must be implemented at the online store to improve profit margins and boost overall revenue. You can do this task manually, or you may automate it by coordinating the appropriate applications with one another.

Continues monitoring and updating:

Pricing should not be seen as a one-time effort but rather as a process of constant changes. Thus it is essential to reevaluate current prices. Besides that, it is also important to have a list of payments online to find ways to cut costs. The different costs associated with other payment methods online can also affect your overall pricing and may prevent you from being competitive among your rivals.

How does dynamic pricing work in ecommerce examples?

Airlines: 

The dynamic pricing model is the foundation of airlines’ conventional revenue management system. Prices for airline tickets are generally altered depending on variables that have nothing to do with the passenger, such as the pricing of competitors, the booking window, and supply and demand. An airline, for instance, may change the price of a ticket depending on the kind of seat, the number of seats still available, and the amount of time left before the departure. Traditional airline dynamic pricing does not consider the individual client and gives the same price to everyone who shops on the platform, regardless of who they are.

Hotels: 

Instead of always giving the exact flat cost, dynamic pricing considers fluctuations in the number of business hotels receive. As a direct result, hotel prices will be higher during solid demand if the hotel implements dynamic pricing. Conversely, as the market diminishes, the costs will decrease to entice further clients. 

Restaurants and Cafes: 

Even the restaurant business is testing out dynamic pricing to see whether or not it would be successful for them as well. Some companies charge more at the busiest times of the day, such as lunch and supper, as well as on the weekends. Then, to boost sales, they temporarily lower the price of some of the products on the menu when the restaurant is less busy.

Advantages of Utilizing Dynamic Pricing in Ecommerce

You will end up saving money as a result in the long run.

The fluctuations in real-time supply and demand for a product are considered while determining dynamic pricing. It monitors the activities of competitors as well as the demand and supply for each specific product. It also takes into consideration the price variations that are occurring in the market. This provides you with the relevant facts and information to optimally price your products and maintain a successful business despite swings in market pricing.

This ends up being a cost-cutting measure in the long term. Because all of the computations are handled by web-based software and apps, there is no need to spend time and effort (and, therefore, money) on manual calculations and the administrative tasks that are associated with them.

You will have a better degree of control over your pricing.

One of the most prevalent arguments against dynamic pricing is that it lowers the amount of control you have over the cost of your items. It produces the opposite effect intended. When you use dynamic pricing as a retailer, you can access real-time price trends for thousands of items within your sector. You will be able to monitor the price adjustments made by your rivals and understand the supply and demand for any unique product.

The trend of personalization in online shopping is gaining steam.

Even if a consumer has less desire to pay for a product or service, a business that uses personalized dynamic pricing may still be able to close the deal. The company will grow more lucrative with this method, although specific clients will pay a higher price than others.

Personalization may also be something that consumers gravitate toward as a preference. By employing data specific to individual consumers, businesses could personalize those customers’ purchasing experiences, which might result in increased levels of customer satisfaction.

Conclusion

If your business operates in online retail, you will find it beneficial to implement dynamic pricing. This strategy is gaining popularity as businesses compete for customers in this current market. Companies that adopt dynamic pricing expand sales, increase revenue, and minimize the time spent on price comparisons.

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