Strategizing pricing is an important part of driving profits, but there’s no one-size-fits-all solution. Understanding the difference between dynamic pricing and variable pricing can help you determine the right way to position products.
What is Dynamic Pricing?
Dynamic pricing is a strategy in which the price of products is ever-changing based on market factors like competitor trends, seasonality, customer behavior, and supply and demand. The value in this process is to drive revenue by determining an optimal price—generally, the highest rate a customer is willing to pay under a given set of circumstances.
This pricing option is particularly valuable for eCommerce sellers as there are many available tools that can guide, refine, or fully automate this process.
When to Use Dynamic Pricing
Dynamic pricing is most effective in any industry that can be impacted by a constantly changing market. This applies largely to spaces where sales data is consistently available, including outside factors beyond internal data trends. Much of the time, dynamic pricing is most effective—and most easily implemented—in online sales contexts.
The dynamic pricing approach can be handled manually, but this is often laborious and ineffective. Dynamic pricing software tools that integrate directly with sales platforms are the easiest way to achieve objectives in this space.
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What is Variable Pricing?
Variable pricing is similar to dynamic pricing in that rates aren’t static indefinitely but rather are determined—and changed—based on specific external factors. This generally leads to prices that are set for longer periods of time than when dynamic pricing is in use; rather than shifts day by day or even hour by hour, variable prices tend to remain in place for weeks, months, or seasons.
Variable pricing is much more straightforward to manage than dynamic pricing, as fewer indicators are taken into account. For example, a product price might be raised due to an in-demand season, like bathing suits in the summer, and dropped during the winter months.
When to Use Variable Pricing
Variable pricing makes the most sense in industries where there’s minimal information used to drive decision-making. This isn’t necessarily a failure to understand a market; rather, some industries simply don’t see the need for variability others might.
This pricing model is generally seen in more B2B contexts than B2C. Airline prices can shift significantly from one day to the next based on all kinds of conditions. However, rates for shipping products from a manufacturer to a distributor—the kind of service one business offers to another—are less governed by market demand.
Variable pricing is also more common in brick-and-mortar stores that rely on little, if any, eCommerce business. This makes it easy to manage manually rather than necessitating software platforms and ever-monitoring algorithms.
Variable and Dynamic Pricing in eCommerce
Which pricing strategy is better for sellers: variable or dynamic pricing? The answer is, of course, circumstantial, based on everything from product types to the scale of operations. However, in the eCommerce world, dynamic pricing tends to be the most logical choice.
Selling on eCommerce marketplaces like Amazon and Walmart.com opens the door to a huge amount of data that can be leveraged into a smarter strategy. Things like price changes in competitors’ products, seasonality, inventory availability, and so much more can all be used to guide basic AI decision-making.
Many platforms make these kinds of tools free and readily available; Amazon, for example, has a dynamic pricing tool in Seller Central that brands can use to get started. In addition, third-party eCommerce platforms often come with more robust pricing tools to go above and beyond what the basics can offer.
Leveraging Pricing Based on Your Business Model
Dynamic pricing is so popular in eCommerce that it’s likely the approach most of your competitors will be using, so sticking with a less flexible approach could mean losing ground. Note that pricing is an element that goes into things like Buy Box wins across multiple marketplaces, so if your pricing can’t stay as competitive as possible, you’ll fall behind in this area, too.
Variable pricing can work just fine for smaller sellers, like those with only a handful of products or who operate in a niche with minimal competition. However, this is unlikely to be the case for anyone trying to stay ahead in a cutthroat space.
How Pricing Strategies Can Impact Business Results
There are many ways pricing can play a role in business results, no matter which strategy makes the most sense for your operations. These include:
- Managing profits: Controlling pricing means dictating how much money you can make on the items you have for sale, and that often means expected profit margins. By changing pricing to correlate with demand and other market factors, you can keep prices competitive without hurting your bottom line.
- One-upping the competition: As noted above, pricing is a key part of staying competitive, including Buy Box wins. With the right strategy, you can position yourself on top as much as possible.
- Enhanced flexibility: Pricing strategies that are designed to change with market movement or outside variables mean the ability to adjust as business needs evolve, keeping pricing at the right place at the right time. When something unique comes up, like a new competitor seeing speedy success, you can quickly adjust to avoid a reduction in revenue.
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The Right Pricing Strategy for Your Business
Pricing strategy, no matter your approach, can be very influential in driving business forward. While there’s a lot to consider, eCommerce pricing easily lends itself to a dynamic model. Basic pricing tools tend to be available for sellers in all of the big marketplaces, like Amazon, but for companies operating on a large scale or who need more robust opportunities, an advanced third-party tool is a must.
Pricing tools built into the AI-driven eCommerce platform from Trellis can help you implement goal-driven dynamic pricing quickly and easily. Combined with a full suite of other sales resources and a unique approach to the four Ps—Product, Price, Promotion, and Place—Trellis offers opportunities unavailable anywhere else. Start a free trial today!
