In order to reach profitability, businesses need to set prices that drive revenue that covers production costs. While lower prices attract more sales but generate less revenue, higher prices can potentially push customers away from your brand. That’s why fine-tuning a pricing strategy is a delicate endeavor.
Understanding Dynamic Pricing
A dynamic pricing strategy is a technique used by companies to quickly changes prices based on environmental factors. The price adjustments are oftentimes done in mere minutes.
In a nutshell, the logic that drives dynamic pricing is to offer the same item at different prices under different conditions.
There are a couple of popular factors that are used today to dynamically determine prices.
Timing As a Basis for Dynamic Pricing
Pricing products dynamically is commonly used by retailers whose inventory is largely based on seasonality. For instance, an online retailer that has a warehouse filled with t-shirts will increase prices during the summer season.
Using Competitors to Set Prices
Competition-based pricing strategies use the competition’s prices as a foundation for corrections.
This is a common tactic in highly competitive industries because even a small price change can sway customers to choose one brand over the other.
Does Dynamic Pricing Take Advantage of Consumers
The company needs to find the sweet spot of getting the price to be as high as possible while still driving revenue from customers. If consumers are willing to accept the costs, then their need is met and equilibrium is achieved.
Conversely, if prices are set too high, then consumers will refuse to make purchases, and sales will drop.
A dynamic pricing strategy appeals to consumers who love looking for deals and discounts. Many consumers enjoy the thrill of hunting for better prices and comparing products in an attempt to get a deal.
Why Does Static Pricing Come Up Short?
Static pricing relies on fixing prices for a lengthy period. The obvious problem with this strategy is that an increase in your fixed costs will eat into your profitability.
Businesses that use a static pricing strategy run the risk of losing potential revenue during changes in the market.
When properly executed, a dynamic pricing strategy is one of the most effective pricing models around.
Empowers Companies to Attract Customers
Reducing prices when there’s a drop in sales can contribute to an increase in the revenue of certain products.
Companies can get an upper hand over the competition by making price corrections in real-time. Having the ability to instantly modify your pricing model in response to market changes helps boost your company’s competitiveness.
Dynamic Pricing Software
Businesses need a software solution that enables subject-matter experts to add all the relevant data in order to automatically set different prices. This way, companies can make immediate changes as soon as new market conditions arise.
This is why most companies have a business rules engine running under the hood of their enterprise software. A rules engine runs rules-based algorithms that enable software solutions to calculate demand, and inventory levels in order to set appropriate prices.