Dynamic pricing is a type of price discrimination based on the concept that your prices changed based on your own product costs as well as your competitor’s prices to find the optimum price point at any time.
Sounds good, huh?
But what about the disadvantages of dynamic pricing? Can using it actually hinder your pricing efforts?
In this blog post, we’re going to drill down on the advantages and disadvantages of using dynamic pricing.
We’ll then evaluate the best approach to take if you do decide to move forward with dynamic pricing.
With the right dynamic pricing software, you can maximize profits
One core advantage of dynamic pricing is the ability to maximize your profits with each customer. Think about it this way – if initial demand for your product is low, and you need to get rid of your stock, you can lower your prices to facilitate that and generate whatever extra revenue you can.
In the same way, if demand is high – say for a seasonal product, you can increase your prices in line with the demand.
The Christmas Palace currently sells their trees for $69-$699.
But what you need to remember is it’s currently June. There will be far fewer people thinking about purchasing a Christmas tree this time of the year. However, during December, they would and should increase their prices.
This way anyone who has put off buying their tree will be more likely to pay a premium price simply because they don’t want to miss out on having one and joining in the festivities.
Keep on top of your competitors
In previous content, we’ve spent a long time thinking or talking about the importance of keeping track of what your competitors are doing. I mean, at the end of the day our entire software is built on that concept.
So implementing a dynamic pricing strategy, by default forces you to think about what your competitors are charging, allows you to keep on track of key industry and market trends.
Research by Forrester suggests that using price optimization software to keep track of your competitors and trends can improve your gross margins by up to 10%. What’s more, using dynamic pricing has seen profit boosts of 25%.
There’s really no reason why you shouldn’t think about implementing the strategy for your eCommerce store.
Use dynamic pricing in conjunction with sales and offers
Despite the few disadvantages of dynamic pricing, please remember that naturally, customers are used to paying different prices for their products.
The use of discounts and promotion often leads to customers paying different prices for the same products, so if you are at all concerned with the disadvantages of your dynamic pricing strategy, consider coupling dynamic pricing with your sales and discounts strategy.
We’ve had a look at some of the advantages of dynamic pricing and largely, it seems like a good strategy to use for your eCommerce store, but what about the disadvantages? How can using a dynamic pricing strategy actually hinder your profits and revenue from increasing?
Using dynamic pricing can lead to customer alienation
No one likes to feel like they got a bad deal. They also don’t like to feel like they’ve paid more than other people for the same product or service. You do run the risk of alienating your customers if they found out their friend paid half the price for the same price.
This can often lead to bad reviews, complaints or worse, asking for their money back.
Worse yet, if you want your customers to stay loyal, alienating them is not the way to go. The ultimate aim of any eCommerce store should be to move towards customer retention, especially because it’s much cheaper for you to keep a current customer coming back than it is to get a new one.
One way to combat this is to let customers know that the pricing will be set on the day to keep up with demand.
This approach is very common in restaurants where the food is sold by the weight of the food item.
Because they can’t predict how much the specific fish of the day will cost, they use a market price on the day.
This means that two people could order the same thing and pay a different price.
However, this tactic is less likely to alienate customers because the restaurant has used a level of transparency about potential price changes.
See if you could use this idea in your eCommerce store.
You are already operating in a highly competitive market as it is. What you don’t want to do is drive your customers towards your competition.
And it becomes apparent you’re increasing your prices, your customers are much more likely to shop around and see if they can find the same or similar product cheaper somewhere else.
So in many cases, using dynamic pricing can actually move your customers towards your competitors.
Something, I’m sure most eCommerce vendors don’t want to happen.
You need to rely on good technology
Dynamic pricing without the use of advanced eCommerce price comparison technology to help optimize your prices based on data rather than feeling is a bad decision.
This is because a dynamic pricing strategy is best used when price optimization is automated throughout the year. Not only because it would take far too much time to do it manually, but you may interpret the data wrong and draw the wrong conclusions.
Remember, dynamic pricing is all about finding the optimum price for your products, not simply just the highest or lowest prices.
Another added benefits of using a good dynamic pricing technology is you can ensure you don’t adopt a race to the bottom approach. You can set guidelines so your lowest price isn’t lower than what you can afford to sell for and still make a profit.
Advantages and Disadvantages of Dynamic Pricing
Although this blog post looked at both the advantages and disadvantages of dynamic pricing strategy, there are definitely workarounds to the disadvantages.
If anything, the disadvantages are more like things you should be aware of.
We’re still big advocates for a dynamic pricing strategy but do believe that you should implement it in a controlled way using data as the basis for your price optimization.
Have you ever used dynamic pricing for your eCommerce store? Drop a comment below.