To succeed in eCommerce, strategy is central. From content creation to keyword research, every aspect of your approach needs to be on point—and that includes pricing. Unfortunately, pricing products isn’t a set-it-and-forget-it part of a sales process; to stay competitive, it’s important to set prices that make what you have to offer as appealing as possible.
These dynamic pricing strategies and tips can help you present prices that always work in your favor.
What is Dynamic Pricing?
Dynamic pricing is a method of optimizing product pricing based on internal and external business goals and marketplace factors. Rather than setting a price once and never looking back, dynamic pricing relies on regular changes to respond to shifting market landscapes.
For most of sales history, pricing was seen as rather static. Products had prices, and they tended to stay at those prices unless something notable happened, like rising costs of living or more expensive manufacturing demands. However, this began to change in the 1980s, largely due to the airline industry. By adjusting the cost of flights based on factors like the time of year, the route in question, and the time of departure, airlines were able to raise profits without doing anything significantly different in day-to-day operations.
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How Does Dynamic Pricing Work?
To properly function, dynamic pricing requires implementing strategies to change prices throughout a sales cycle. There’s no right answer for how to approach the process; with multiple ways to handle price changes and numerous types to choose from, making dynamic pricing work for you will depend on what your business prioritizes and the models that make the most sense in your industry.
Regardless of approach, how to implement dynamic pricing requires understanding that pricing needs to change over time as well as a method to make that happen.
Benefits of an Effective Dynamic Pricing Strategy
Dynamic pricing offers a lot of benefits to companies, regardless of sector or industry. These include:
- Greater control over pricing based on real-time trends in your own business as well as in the context of the performance of competitors.
- Ways to change pricing perspectives without compromising on the value of your brand.
- Cost savings via maximizing profit and driving sales at the most critical times.
- An opportunity to boost your bottom line without changing anything fundamental about the back-end operations of your company, like product production and fulfillment.
- Easy management opportunities with the right pricing tools in place.
To what extent these benefits will apply to your company will depend on factors such as your particular industry and your ability to implement the right strategies at the right time.
Types of Dynamic Pricing
Dynamic pricing comes in numerous forms, some more popular than others. Not all dynamic pricing models will be appropriate for all applications, so it’s important to understand all of the available opportunities when assessing options.
- Time-based pricing: Time-based pricing refers to pricing strategies that fluctuate based on time of the year. For example, travel resources, like airlines or trains, will often raise rates during the holiday season as they know demand will be high.
- Peak pricing: Most commonly seen in spaces like rideshare apps, peak pricing refers to increased rates in periods of highest demand.
- Inventory-based pricing: This form of pricing fluctuation is driven by inventory availability; the less inventory available, the more customers may be willing to pay.
- Competitor-based pricing: Competitor-based pricing is centered on remaining competitive in a marketplace. It can work in several different ways, including raising prices in response to market demand or attempting to offer the best value for customers.
- Customer behavior pricing: Unlike competitor-based pricing, this strategy ignores what other players in the market are doing and instead focuses on customers’ activity, like how much shoppers are willing to pay and the trends in demand.
- Segmented pricing: Segmented pricing is, simply put, a form of legal and permissible pricing discrimination in which certain populations that aren’t legally protected are offered different pricing, like lower pricing for college students.
- Geographical pricing: This form of dynamic pricing focuses specifically on where a customer is located; this can lead to higher pricing in regions that have a higher cost of living.
- Personalized pricing: As the name implies, this form of dynamic pricing requires setting individual pricing benchmarks for individual customers or customer demographics. This might mean lower prices on frequently purchased products or coupon codes based on prior buying behaviors.
- Event-based pricing: Event-based pricing focuses on pricing products or services appropriately based on customer expectations or demand. This might mean pricing sports tickets higher when a particular game is a match-up between rival teams.
- Market conditions: In this strategy, pricing is dependent on the state of the market, which might relate to trends in purchasing or economic upturns and downturns.
- Loyalty-based pricing: Loyalty pricing is a very common way of rewarding regular customers and is generally offered through rewards programs or discount codes provided to members of an email list, for example.
- Penetration pricing: Most commonly seen in new businesses trying to enter a competitive space, penetration pricing is focused on setting desirable prices, often significantly cheaper than other players, in order to change current buying behaviors.
3 Ways to Implement Dynamic Pricing
Just as there are different approaches to creating a dynamic pricing strategy on Amazon, there are also different ways to implement these strategies. Which one is right for a particular company will depend on scale, objectives, and available resources.
Manual Price Adjustments
While cumbersome and time-consuming, manually adjusting pricing is indeed an option. This method involves selecting products or services from an inventory list and changing pricing based on updated needs. However, approaching pricing from a manual perspective generally means more arbitrary decision making without the insights a pricing tool can provide.
Code Your Dynamic Pricing Model
For tech-savvy sellers, it’s possible to code your own dynamic pricing model. This kind of project ensures complete ownership of the process and can incorporate all of the facets of an industry that are most influential. As a personalized opportunity, self-established pricing tools can help a company tap into resources or processes that may not be available elsewhere.
Use Dynamic Pricing Tools
For many companies, leveraging dynamic pricing tools will be the easiest and safest way to make intelligent pricing choices. Leveraging third-party resources means less time invested in the process and more opportunities to fine-tune your pricing strategy.
These platforms often incorporate a wealth of analytics related to a given market. Some tools allow users to implement a particular strategy on an ongoing basis, while other AI-driven tools incorporate an element of machine learning to determine a customized approach to optimizing pricing based on trends and other data.
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Examples of Dynamic Pricing
Dynamic pricing comes in numerous shapes and sizes, so it’s not surprising companies and industries of all kinds employ strategies to their advantage. These are some of the most notable dynamic pricing industries, followed by concrete examples and how these businesses benefit.
eCommerce
Dynamic pricing on Amazon and other eCommerce platforms can be a good way to increase revenue. By finding a sweet spot for product pricing at any given time, these retailers can ensure they’re offering an appropriate rate under any circumstances. The factors eCommerce retailers tend to evaluate include:
- Supply and demand
- Competitor pricing
- Learned customer behavior
- Sales requirements
- Seasonality
Amazon
As one of the largest eCommerce platforms in the world, Amazon is a leader in driving profits through dynamic pricing. The site leverages dynamic pricing significantly, with pricing on products shifting in real time throughout the day. This is a default feature for Amazon’s own inventory but is also an option for third-party sellers. Sellers can utilize the built-in pricing tools in Seller Central or employ third-party resources for a more robust approach.
Google Ads
Google Ads are a vital business tool for promoting brands and products, and, accordingly, pricing is often fluctuating. The amount advertisers can expect to pay for sponsored ads can vary based on everything from keywords used to location and audience. Advertisers can improve their odds by following trends and adjusting bids accordingly, but at all times, Google is trying to drive as much profit as possible.
Ridesharing
Rideshare companies like Uber and Lyft are notorious for “surge pricing,” or high pricing during peak periods of service. Pricing is always in flux; by using AI, these kinds of services can determine when demand is at its highest and capitalize on that. Points of consideration include:
- Number of drivers available
- Desired routes
- Location and transportation alternatives
- Customer demand
- Weather
Originally, Uber used a multiplier system for surge pricing, allowing customers context for the price increases. However, this is no longer the case; customers are given an upfront price for a total ride without insight into contributing factors.
Uber
The first of the major rideshare players, Uber set the standard for dynamic pricing in this space. Even in its earliest days, Uber was forever changing prices based on many different factors, from driver availability to time of day. Uber embraces a peak pricing model, demanding higher rates at times like weekends or evenings when people may be trying to get home from bars or parties.
While this approach has resulted in customer frustration and the occasional online gripe about truly egregious prices offered, the quick adoption by the competition has solidified this business model as a non-negotiable for riders.
Fast food
Fast food is a space that has historically held to one set of prices outside of occasional upward shifts year over year, so the inclusion of dynamic pricing would be quite a game changer. While only theoretical currently, utilizing an AI-driven model could allow restaurants to lure in customers with lower pricing during slow periods. This approach could also make certain products more appealing at specific times and charge a premium during popular times of day.
Wendy’s
Dynamic pricing announced by Wendy’s hasn’t gone live yet—and may not at all, based on proposed legislation—but per an announcement by the CEO, the company is planning to unveil a digital menu-board system in 2025 that will use AI analysis to change pricing throughout the day based on customer behavior trends. This was pitched as a good thing for everyone involved, investors and diners alike. However, the unveiled plans sound similar to peak pricing, which could result in customers paying more for the same food if they order during common lunch or dinner times.
Airlines
As one of the originators of today’s dynamic pricing models, airlines are among the top users in this space. Many airlines change pricing based on things like:
- Flight duration
- Route in use
- Time of day
- Time of ticket purchase
- Frequent flier status
- Seasonality
- Competitor flights
One of the most notable ways airlines succeed in this space is by using airport “hubs,” or airports in which one carrier serves significantly more passengers. For example, Newark Liberty International is a hub for United Airlines; nearly 60% of flights from Newark are United. Since some routes are dominated by specific carriers, airlines can raise pricing in response to demand when there are few, if any, alternatives.
Delta Airlines
Delta is not the only airline that leverages dynamic pricing, but the company is certainly a major player in pricing in the aviation industry—a marketplace that played a key role in the evolution of this principle in the first place.
Delta uses several different strategies to determine pricing. These can include raising rates during high-traffic periods, like the holidays, increasing pricing when competition is scarce, and efforts to target frequent fliers, as these individuals will require flights regardless of an elevated price point. By having these measures in place, Delta can demand high pricing without driving customers away.
Hospitality
Throughout the hospitality industry, dynamic pricing can be implemented to boost profits. Hotels, in particular, as well as alternatives like Airbnb, use dynamic pricing to fill rooms at the highest potential price points. This can result in pricing changes based on elements like:
- Seasonality and demand; for example, during vacation seasons or the holidays
- Available rooms
- Local competition
- Market pricing
- Travel trends; during the height of COVID-19, many hotels offered extremely low rates
- Day of the week
- Days left to book
Marketplace-based alternatives, like Airbnb and VRBO, may also consider property satisfaction ratings and reviews, as well as historic performance in relation to similar options.
Airbnb
Airbnb is among the most notable examples of dynamic pricing, and not always in a good way; the company, which once offered a very affordable alternative to hotels, has been the source of significant critique in past years as pricing reaches new highs without necessarily offering commensurate services. Regardless of reputation, Airbnb implements dynamic pricing in multiple ways, including the location of a property, time of year, days left to book, competitor pricing, and duration of a stay. When these factors are used in combination, Airbnb can force high pricing across a significant portion of the country.
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Considerations When Implementing Dynamic Pricing
As with any business-related strategy, making changes to processes needs to be handled with intention. With so many different avenues for potential pricing approaches, it’s important to determine why you’re adopting dynamic pricing and what methods are best for you.
Business Objectives
Before moving forward with a new approach to pricing, evaluate what you’re hoping to achieve with this change in procedure. Do you want to grow profits? Attract new customers? Cultivate a competitive advantage? Regardless, you’ll want to pick a pricing method that makes the most sense with the objectives your business is working toward.
Data Collection
Data-driven decision making is only as good as the data available. If access to industry information, for example, is flawed or incomplete, you may be basing pricing strategies on erroneous assumptions. Be realistic about the data available to you and how it can be best utilized to make sure what you’re planning actually aligns with your goals.
When evaluating third-party tools, ensure data collection and analysis is a part of the process. Not all resources will have access to the same level of information or be able to properly leverage information in the creation of efficient strategies.
Success KPIs
The KPIs your business relies on should also play a role in your approach to setting prices, particularly when a new strategy will change the kinds of results you can expect to see. For example, if net revenue is a key KPI, you’ll want to analyze pricing strategies that are intended to maximize profit rather than attracting new customers, no matter the cost. If your company is considering using a third-party eCommerce resource, ensure all necessary KPIs can be tracked; collecting information in bits and pieces can make gauging success more complicated.
Type of Pricing Strategy
As demonstrated, dynamic pricing strategies come in numerous forms and functions. In order to make the practice work for you, you’ll need to determine the right method for your identified business objectives. There’s no right answer, and it may be possible to make cases for multiple avenues. As such, you’ll need to carefully assess all of the available options and determine an ideal starting point.
It’s important to note that this isn’t necessarily a finite choice or even the case of picking a single method. It’s possible to employ numerous dynamic pricing types at once based on company needs. For example, a company may rely on event-based pricing for most aspects of doing business but will also implement a time-based pricing model to capitalize on things like the winter holiday season.
Drawbacks of Dynamic Pricing
While dynamic pricing does have many upsides, there are some disadvantages companies should consider when developing a strategy. These include:
- Customer backlash: Many customers dislike the feeling of being price-gouged, so sky-high pricing choices can lead to customers distrusting a brand and looking elsewhere in future sales decisions.
- Reliance on outdated or irrelevant data: Sales strategies are only as good as the information driving them, so if data is sourced improperly or incompletely, approaches to dynamic pricing might backfire.
- Changes in customer behavior: If customers start seeing trends in your pricing, like which days of the week or times of the year pricing tends to be most expensive, they may hold off on buying or choose to purchase from a competitor.
However, most of these drawbacks can be avoided with a well-constructed and reasoned dynamic pricing strategy.
Is Dynamic Pricing Legal?
In most cases, yes, dynamic pricing is fully legal.
However, this is not the case for pricing discrimination against legally protected classes. While the Robinson-Patman Act of 1936 went largely unchecked over recent decades, the tide is starting to turn, with the FTC focusing more intensely on problematic pricing in the last several years. Companies that want to stay on the right side of the law are encouraged to make sure any pricing plans are both fair to customers and implemented legally.
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Implement Dynamic Pricing with Trellis
While manual pricing is possible, and eCommerce platforms like Amazon offer some support in this area, many companies will require tools that go above and beyond the basics. Dynamic Pricing from Trellis supports your eCommerce goals by using AI learning to create specialized pricing strategies that can evolve over time. Ideal for staying a step ahead of the competition, our tools can help you grow your business. Connect with us today to learn more.
