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Dynamic Pricing in Ecommerce 4 minute read
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May 26, 2021

Dynamic Pricing in eCommerce: How it Works

Brian Dearth
Brian Dearth
Head of Strategy and Growth
Dynamic Pricing in Ecommerce

Dynamic pricing is not a new theory or practice. Rather, the concept of updating pricing based on supply and demand has been an integral piece of commerce strategy for centuries.

Today, however, in the technology-driven world of eCommerce, a new angle is emerging.

By pairing dynamic pricing concepts with advanced eCommerce strategies, brands are now able to tap into powerful methods for maximizing profit margins. And much of it can happen automatically.

With this being said, let’s look at how dynamic pricing works and ideas around how best to implement dynamic pricing into your eCommerce strategy. 

What is Dynamic Pricing?

Dynamic pricing incorporates scalable and continual repricing strategies that involve constantly changing the price of products based on a few critical factors, including:

  • Supply and demand
  • Market trends
  • Competition and industry standards
  • Consumer expectations

A prime example of this is Amazon’s pricing model. Amazon constantly adjusts its pricing on a minute-by-minute basis. Their algorithm filters through large amounts of data, including market trends, competitor pricing, consumer habits, and more. The result is that they can sell more products at the highest profit possible. Have you ever put something in your Amazon cart or wish list only to get a message later that the price of the item has changed?

Now Amazon is a MASSIVE MARKETPLACE..., but the same ideas hold for all eCommerce sites.  They are an ideal setting for dynamic pricing strategies by leveraging new technology platforms (many utilizing AI), where prices can constantly adapt intelligently—benefiting both you and your customers in finding the optimal price points for your products and services. 

Optimizing Based on Market Trends

Perhaps the most fundamental application of dynamic pricing is optimizing prices based on market trends.

This analysis begins by identifying the competitive landscape for both current and new markets. Based on this analysis, pricing can be adjusted to tap into previously untouched markets. Overall market-based pricing is a great way to begin the optimization process and deliver on a growth objective in your digital commerce strategy.

While market trends have generally/always played a critical role in pricing—standing alone, this data set does not tell a holistic picture. 

Getting To Know Your Competitors and Retailers

Married to market trends is the adaptation of pricing based on your competitors and their current, as well as historical, pricing strategies. This is particularly relevant in the B2C sector, where pricing plays a critical role in decision-making given that a small price difference on an item can add up to a huge impact.

Factoring this into your dynamic pricing strategy involves carefully monitoring and tracking your competitors’ prices constantly.

This is another area where eCommerce sites are ideal for this technology—with dynamic pricing platforms, you can automate the tracking down to the item or SKU level.

For B2B commerce, tied closely to tracking competition’s pricing is monitoring retailers and resellers to gain an understanding of who is selling your products, where, and at what price. This will help you determine the right wholesale pricing strategy. This is especially helpful for verticals adhering to MAP (minimum advertised pricing). There is also an application for retailers, gathering this data can be an arduous task if it’s not automated by a dynamic pricing platform and monitoring competitors for MAP violations can give you leverage (information) to go back to your suppliers.

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Creating an Aligned Ecommerce and Marketing Strategy

If your business already has a dynamic pricing strategy in place, then the key to optimizing this tactic further requires that your pricing strategy and eCommerce strategy are aligned.

For omnichannel retailers, this is critical. For example, take a look at profit margins across channels for apparel retailers.

On average:

  • In-store sales had a profit margin of 32%
  • Online sales had a profit margin of 30%
  • Buy online pick up in-store (BOPIS) had a profit margin of 23%
  • Online ship from the store had a profit margin of 12%

It is also important to factor in that BOPIS returns may have a higher contribution due to upselling opportunities while in-store and minimizing returns.

In the same vein, it is critical to align your marketing budget to the most profitable products based on dynamic pricing. This is one of the most important insights to bring back to your marketing team and is one of the top pricing strategy mistakes. Putting marketing dollars in support of the most profitable products is an essential best practice that helps align all strategies. In doing so, marketing teams can adjust their spending in real-time as product pricing is also dynamically shifting.

The Key to Implementation

While the fundamentals of dynamic pricing are well established, the difficulty lies in how you gather large data sets on an ongoing basis and feed this back into your eCommerce strategy.

The manual methods that businesses have relied on historically can only get you so far. For this reason, the first step to implementation is picking the right platform.

Shifting to a Dynamic Platform

Today, AI-based pricing applications, such as PriceShape, eliminate manual competitive analysis and calculations, providing an automated process that combines internal and competitive pricing with inventory data.

These inputs eliminate guesswork and can be weighted on a custom basis. This allows for data-based, intuitive pricing decisions that can be enacted in real-time.

Additionally, because many of these tools track stock levels, you can use this as an upsell opportunity to move more products. In times of high seasonal demand, you can monitor stock levels and increase prices relative to competitive inventory. Not only does this create a competitive advantage, but it can also create more loyal customers via a better customer experience.

Constantly Re-Evaluating Your Strategy

Regardless of the process or platform you use to implement your dynamic pricing strategies, you must re-evaluate the overall strategy continuously. This is not a one-and-done scenario, as your competitive landscape is constantly changing. Simultaneously, your overall eCommerce customer experience and the expectations that follow never remain in one place for long.

This can all have an impact on the potential for increasing revenue and maximizing profit. Through daily, weekly, and quarterly evaluations, you can ensure that your pricing structure paired with your eCommerce strategy is still delivering the expected value.

Rely on Expertise

In most eCommerce businesses, there is a lack of bandwidth for implementing new platforms and pricing models—placing a heavy burden on IT, marketing, or merchandising teams.

At Vaimo, we can help you optimize your pricing strategy so that it aligns with your business goals and delivers the best value to your customers. 

We begin with an analysis, benchmarking you against your competitive set, then help you develop a strategy around the best paths forward that have the most business impact. If you are not currently employing some form of dynamic pricing strategy and would like to learn more—reach out below, we’d be glad to chat. 

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