eCommerce Dynamic Pricing: How to Use Dynamic Pricing to Explode Your Profit Margin
Allow us to be blunt:
Your eCommerce company lives and dies by your approach to pricing your products.
Even if you have the best product in the world, a poorly-planned pricing strategy can cause major problems for your company. Price it too high, and no one will be able to afford it; price it too low, and your profit margin goes “bye bye.”
The point is, your pricing strategy has a major impact on the success your eCommerce business experiences.
And it impacts your business in two huge ways:
First, it affects your customers’ purchasing decision. In fact, HubSpot found that 80% of consumers see price as the number one deciding factor when it comes to buying a certain item or not; Stax also found that half of consumers rank “price” as one of their top three decision-making factors. As we’ll get to, there’s more to this than simply offering “the lowest price around.”
Secondly, your approach to pricing dictates how much money your eCommerce company will — or can — make over a given period of time. With no pricing strategy in place, you might feel resigned to selling your products for only a slight profit; with a proper strategy in place, though, you’ll immediately realize you’ve been leaving money on the table this entire time.
Now, before we go any further, we want to point out that strategic pricing isn’t about figuring out how to squeeze every last penny out of your hard-working customers. While there are some black-hat pricing strategies out there intending to do just that, that’s not what we’re here for.
Rather, our goal is to help you find that “sweet spot” in which your prices meet your customers’ expectations (making them more than happy to open their wallets), and are also high enough to maximize the amount of revenue generated with each sale.
Today, we’re going to talk about a specific pricing strategy used by many companies in eCommerce and other industries today:
Here's a quick list of what you'll find in this article about eCommerce dynamic pricing:
- What is dynamic pricing?
- How does dynamic pricing work?
- The benefits of dynamic pricing
- 3 dynamic pricing pitfalls to avoid
- Getting started with dynamic pricing: Everything you need to know
- The dos and don’ts of dynamic pricing
- How to gradually implement dynamic pricing into your eCommerce business
What is dynamic pricing?
Have you ever heard of competitor-based pricing?
How about market-based pricing?
If you have, then you’re already at least somewhat familiar with dynamic pricing.
(Note: While often considered to be synonymous with “dynamic pricing,” these terms are actually types of dynamic pricing. We’ll come back to that a bit later.)
The simplest of definitions for dynamic pricing is as follows:
“Dynamic pricing is the process of setting and fluctuating your products’ prices over time based on a variety of factors, conditions, trends, and predictions.”
These factors include:
- Industry standards: Industry-wide average pricing; pricing ranges; most common prices amongst competitors
- Market conditions: Past, current, and future supply and demand; Consumer purchasing patterns/habits (both yours and your industry’s)
- Consumer expectations: How much your customers are happy to pay and how much they’re willing to pay; How much they expect to pay
Essentially, dynamic pricing is taking all three of the above-mentioned subsets and combining them into one full-blown strategy.
Now, this all sounds like a lot to keep track of (and there’s more, too!).
Don’t worry, though:
Implementing an effective dynamic pricing strategy isn’t meant to happen overnight. In fact, subtlety is key when introducing dynamic pricing into your strategic playbook.
(We’ll come back to this, as well.)
At any rate, this high-level overview should be enough to get you oriented on what dynamic pricing is all about. Now, the question is…
How does dynamic pricing work?
That’s a bit of a silly question, don’t you think?
After all, you already know how dynamic pricing works.
At least, you probably know the basics of it. I mean, you know that candy bars today cost more than they did when you were a kid; you accept that a hot dog at the ballpark costs $15; and you could swear gas was five cents cheaper when you drove by the convenience store just last night.
These rather common examples all show at least shades of dynamic pricing in some way or another:
- Inflation and all that comes with it have caused chocolate makers to increase their prices over the years
- Ballpark vendors control the supply of food and drinks while inside the stadium, so you basically have to pay their prices
- Gas prices often fluctuate daily because...well...you know what, does anyone really know?
All kidding aside, we’re talking about how dynamic pricing really works:
It all comes down to robust automation with a human touch at just the right moments.
Like we said earlier, dynamic pricing requires that you collect a lot of information about your industry, your competition, and your customers.
Needless to say, collecting, organizing, and storing this data is a task better suited for a computer; however, it’s up to your team to define what data they’re looking for, which pieces of info are most important or valuable, and how each data point should impact your products’ pricing. Also, while dynamic pricing tools are made to suggest optimal prices for your products based on all of this data, such a vital moment again requires a hands-on approach from your team.
At any rate, the process of dynamically pricing a single item involves many touchpoints by machine and by human. However, not everyone’s exact process will look exactly the same; that said, here’s an example workflow:
Again, it looks like a lot—and it kind of is. But, again, we’ll show you how to ease your team into all-out dynamic pricing a bit later on.
For now, let’s dig into the benefits of doing so in the first place.
The benefits of dynamic pricing
Again, the main positive byproduct of using dynamic pricing is in the maximizing of both profit margin and sales throughout your company.
But there’s even more good news, here.
Adopting dynamic pricing as your go-to strategy essentially ensures you’ll always remain competitive in terms of price, regardless of what changes may occur. As you know, something is always in flux within every industry at any given time; by knowing and accepting this, you make it easier for your company to stay ahead of the curve.
“Adopting dynamic pricing as your go-to strategy ensures you’ll always remain competitive in terms of price, regardless of what changes may occur.”
Additionally, adopting dynamic pricing also enables you to be granular with your product data. In turn, it becomes easy to optimize your prices on a product-by-product basis.
Full-on dynamic pricing is thorough, in that any and all data that may influence the pricing of a given object is considered at all times, on an on-the-fly basis. As we mentioned earlier, this thoroughness is due in part to the use of software to automate data collection, and also in part to the people behind the “hands-on” moments that occur throughout the pricing process.
3 dynamic pricing pitfalls to avoid
Now, there are some potential traps to watch out for as you begin to implement dynamic pricing. While not a finite list, some of the most detrimental mistakes companies make when implementing dynamic pricing include:
1. Using a “Set it and forget it” attitude
Once again, believing your pricing software will take care of everything is a surefire path to disaster. Let the computer do the grunt work, but make sure you have hands-on-deck at all times.
2. Breeding indecision or distrust amongst customers
Fluctuating your prices too often can cause your customers to try to “wait you out” for a better price in the days to come. Or, worse yet, it may cause them to stop trusting your brand altogether.
3. Starting a race to the bottom
Simply undercutting your competition could cause them to do the same. In turn, the perceived value of your product will ultimately plummet.
We’ll get more into the main “dos” and “don’ts” of dynamic pricing in a moment.
For now, let’s talk about what you need before you get started.
Getting started with dynamic pricing: Everything you need to know
Alright, so the main components of dynamic pricing as we’ve discussed thus far are:
That’s it! That’s all you need to get started.
Okay, okay...let’s take a closer look at each.
1. Choose a dynamic pricing solution that fits your needs
Your pricing software of choice should be:
That is, it should enable you to easily collect as much data as needed to strategically price a product; know how to translate these data points into meaningful and understandable information; and be able to use this information to make automated pricing predictions for now and in the future.
Specifically, you’ll want your pricing software of choice to offer the following features (as are included in the four highest-ranked pricing tools on Capterra):
Your software of choice should also be easy to use, come with an offer of free service and support, and, of course, be offered at a price that fits your company’s budget.
2. Gather relevant data needed for dynamic pricing
We talked about this before, so let’s recap:
To effectively implement your dynamic pricing strategies, you need to work based off of data coming from a variety of sources.
In addition to everything we mentioned earlier (e.g., industry averages, consumer-related metrics, etc.), you also need to look inward, as well.
Get specific with your goals relating to profit margin, revenue, and company growth. Once you nail down these milestones, work out how you can use strategic pricing to help you reach them.
Simply put, without data to know where you’re going—and to know where you want to be—your dynamic pricing initiatives will have a tough time gaining traction.
3. Ensure you have the bandwidth to handle dynamic pricing
Despite the use of automation, adopting a dynamic approach to pricing will likely require even more manpower than you previously had dedicated to your pricing initiatives.
To reiterate, this human touch is needed for three main reasons:
- To define all which your automation software will do in terms of collecting and processing data
- To take this processed data, along with any automated predictions or suggestions, and make a real-world decision regarding pricing
- To ensure your automated software is fully-functional at all times, even when essentially on “cruise control”
While this extra use of human resources may be a bit of an investment for smaller companies, it will pay off in the long run when your use of dynamic pricing spurs your company to massive growth.
The dos and don’ts of dynamic pricing
As we’ve alluded to a few times throughout this article, your new dynamic approach to pricing can potentially lead your company to major success—but it can also be your downfall, as well.
Which side your company will fall to depends on how well you adhere to the following rules:
DO consider your industry’s and competition’s standards, but don’t follow them blindly
It may seem like simply setting your prices “somewhere” within the range of your industry’s standards is the safest course of action, but that’s definitely not the case.
Think about it:
You don’t know much, if anything, about your competitors’ internal metrics. You don’t know their cost of goods sold or their customer acquisition costs, and you certainly don’t know their overall business goals. It simply makes no sense for you to set your prices according to what everyone else in your industry is doing.
Take a look at the following screenshot:
Notice that first and the fourth products listed are the exact same sneaker. Now, notice that Amazon sells it for $49.99, while Foot Locker sells it for $74.99.
This tells me two things:
- Amazon can afford to sell the sneaker for less profit-per-sale
- Foot Locker makes enough profit-per-sale to offset the business it probably loses to Amazon (e.g., consumers looking for the lowest price)
You know what it doesn’t tell me?
If I’m really right about either of these things.
In order to really understand what the deal is with this pricing discrepancy (and how it should affect how my company prices that same product), I would need to do a bit more research.
Should you use these averages and ranges as a frame of reference? Of course; you probably will end up setting your prices somewhere within these ranges, after all. However, you want to get much more specific as to where this “somewhere” is by diving deeper into the many other factors in play.
DO be flexible, but don’t sacrifice your company’s goals
Obviously, the point of using dynamic pricing in the first place is to be flexible in your pricing based on the factors we’ve talked about in this article.
But “being flexible” is completely different from “bending over backward.”
Remember, your goal with dynamic pricing isn’t just to make sales; anyone can sell more by simply setting their prices at ground level. Your goal is to determine the exact price at which consumer purchasing friction is low, and profit margin is high.
That said, it can be easy to lose sight of your true goal, which in turn can cause you to make changes to your prices that don’t help your company all that much. Stay focused on your main goal, though, and your profit margin will skyrocket.
DO be opportunistic, but don’t take advantage
We all know that urgency- and scarcity-related tactics are pretty common in the world of eCommerce—and there’s nothing wrong with that.
There’s also nothing wrong with increasing your prices accordingly as demand begins to increase, either.
(After all, these are essentially the building blocks of a supply and demand economy, right?)
However, once again, there’s a difference between taking advantage of an opportunity, and taking advantage of the people behind this opportunity.
Say your eCommerce store sells sporting goods memorabilia, and you notice a former baseball player’s rookie card has increased in value over the last week; turns out, he was just inducted into the Hall of Fame. This awesome news for him is also great news for you: you’ll definitely be able to increase the price of anything with his name on it for the foreseeable future.
However, if it turns out the odd change in the card’s value was due to the man’s untimely passing, you have a decision to make. While it’s certainly not unheard of for those in such a position to ignore the human aspects of the circumstances and up the price anyway, those that do risk alienating their customers in a pretty irreparable manner.
As we said in the intro, dynamic pricing isn’t about squeezing your customers out—especially when they may be more vulnerable. While there’s nothing wrong with ensuring you’re being compensated fairly for each sale you make, you don’t want your company to be known as one that takes advantage of your customers.
How to gradually implement dynamic pricing into your eCommerce business
A few times now, we’ve mentioned that implementing dynamic pricing isn’t—and shouldn’t—be something that happens overnight.
The reason behind this is two-fold:
First, making an immediate switch to your pricing game plan would almost certainly wreak havoc on your organization. Your cash flow would be thrown out of whack, your team members would still be catching up on their new assignments...it just wouldn’t be pretty.
Secondly, your long-time customers would absolutely notice if your prices start fluctuating more than usual within a short period of time. When it comes to matters of money, the slow and steady approach is essential in order to avoid shocking your audience members into distrusting you.
That said, let’s quickly discuss how to “ease into” a full-blown dynamic approach to your eCommerce pricing strategies.
1. Start with initial pricing
If your brand is new to eCommerce and hasn’t given much thought to your pricing strategies, this is probably where you are at the current moment (hence initial pricing).
Initial pricing is pretty straightforward: The fledgling retailer uses their initial understandings of their market and their industry’s pricing standards, coupled with an idea of their sought-after profit margin, and prices their products accordingly.
While it’s certainly possible to experience some success with this basic method, it should be clear by now that even successful companies using this method are leaving a ton of potential revenue in the air.
2. Introduce a loyalty program
Another subtle way to bring in dynamic pricing is to introduce a multi-level loyal program which allows you to segment your customers into groups and implement different dynamic pricing strategies to each one.
Equestrian brand Mustad Saddleworth, a Core dna client, has a loyalty program that applies discounts based on which group their customers belong to. They took advantage of Core dna’s User Group feature for their Bronze, Silver and Gold loyalty reward membership. Each of these groups has it own pricing strategy and discount level. For example, Bronze membership is 10 percent cheaper than non-members, and Silver is 15 percent cheaper, and so on.
Stanley PMI also took advantage of Core dna’s User Groups to create a loyalty program for their employees. They were also able to assign personas to each user group so they can deliver tailored content for each group.
A third client of Core dna, Northeast Nursery, also leverages the power of loyalty programs. They used Core dna to build out a separate wholesale pricing based on tiers, similar to the strategy adopted by Mustad.
3. Integrate demand pricing
The second tier, demand pricing, takes into consideration everything we just mentioned, and adds data related to demand into the mix.
Basically, this method uses the initially-defined prices as a “balance” of sorts, then increases or decreases the price according to current demand. Again, it’s pretty straightforward: When demand is high, the price can increase accordingly; when demand is low, price should decrease.
The problem with this approach is that it’s “faux-flexible.” Sure, you are fluctuating your prices in a more informed and strategic manner—but you’re still hanging onto a single price point as the “actual” price of your product (and any fluctuations are seen as “just temporary”). The reason this is such a big deal will become apparent in a moment.
4. Understand and implement perception pricing
With demand pricing, we’ve started to consider the consumer’s perspective when setting our price points—but we’ve really only scratched the surface.
While you’ll still be thinking about whether or not your target audience wants your product, you’ll also now be considering the all-important question:
How much are your target customers willing to pay for your product?
Here’s where things start to get granular.
You’re no longer shooting from the hip when increasing or decreasing your pricing.
Now, you’re considering factors such as:
- Your product’s perceived value
- Your target customer’s ability to afford your product
- Your target customer’s willingness to pay more for your product
Speaking of competing with your rivals on value and price...
5. Work competition-based pricing into the mix
Notice that we waited until now to start looking at what our competition is doing?
Sure, we used industry averages and all during the initial phase, but we specifically avoided data regarding our individual competitors even at the beginning. As we mentioned above, doing so would have unintentionally tethered us to a given price as “the” price of the product in question—in turn rendering our pricing strategies rather inflexible.
Anyway, you certainly do want to consider your competition’s approaches to pricing as you continue to fine-tune your own pricing.
On the surface, this means ensuring your prices fit into some kind of range regarding your industry’s averages (or, if not, it means ensuring you have a good reason for offering your product at a higher price).
On a deeper level, though, you’ll want to gain a true understanding of the strategies your competitors are using to price their products. That is, you want to understand not just what they’re doing in terms of pricing, but why they’re doing it, as well.
(And, again, this info is still only just some of the info you’ll use to influence your own pricing decisions.)
6. Adopt a truly holistic approach to pricing
You know how we’ve been saying not to tether yourself to any given price point for your products?
That’s because there is no “real” price for anything.
- Chocolate bars cost $1.50 when they used to cost a quarter
- Hot dogs cost $15 at Yankee Stadium, and $5 for a 10-pack at the grocery store
- Gas costs $2.15 in Delaware right now, and $3.15 in Hawaii at the exact same moment
None of these prices is the “real” price of these products.
The only “real” price for any product is the price that someone is willing to pay for it right now. And there are an almost infinite amount of factors that play into the amount an individual is willing to pay for something at any given moment—from industry averages and demand trends, to whether or not an individual customer skipped breakfast this morning.
Obviously, that was a bit of an exaggeration.
Of course, you aren’t expected to truly know and consider everything about a given customer’s circumstances when pricing your products.
But that’s okay.
In fact, that’s the point.
To truly adopt a dynamic approach to pricing, you need to accept that you’ll never know enough to discover the indisputably “right” price of an item (and, even if you did, it would change pretty much immediately).
Now, this isn’t to say that it’s futile to strive toward a perfect pricing strategy. On the contrary, there will always be some new piece of information that might help you optimize your pricing just a bit more.
That being the case, your ultimate goal as you implement dynamic pricing should be to continue learning as much as you can about your industry, your competitors, and your customers, and to stay focused on what all this information means for your products’ prices.