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An introduction to dynamic pricing for Ecommerce

Author's avatar By Expert commentator 11 Mar, 2014
Essential Essential topic

Out with the Old, In with the…Old.  Why Dynamic pricing is even more relevant today

DynamicpricingDynamic pricing is a price-setting approach relying on data analysis and flexibility. It allows to shape and control price changes on the fly, depending on customer’s previous interactions with the website and his general profile. Items like past searches and purchases, location, time and date of previous searches and purchases are taken into account to generate a personalised offer.

Dynamic pricing has been around for nearly 15 years when retailers like Amazon started testing this. So, this isn’t a new practice but each year that technology advances, so does the way we use dynamic pricing. As a business owner, the opportunities for delivering more relevant propositions has improved.

From search history to previous purchases, customer location to general tastes, it allows a business owner to personalise its offer on a user per user basis.

This is not only useful for the company (as personalised offers are more likely to lead to sales); but also for the customer as many potential cross sells based on his/her interests are uncovered. However, the amount of information used for personalisation can seem daunting at first – where to start? What can be collected? How can it be used to make sure it doesn’t invade user privacy?

It generally starts with a cookie, those tiny text files a website drops on your machine each time you visit a website. There are ways to limit cookie usage/tracking (and the European Commission has recently brought the matter to a vote), but everyday users are generally unaware of how far this goes.

Advertising like Dynamic Pricing and repurpose advertising are targeting customers with impressive accuracy these days and the customers themselves are likely unaware of what is happening.

With the advent of big data, the total number of information any business possesses and is able to analyse has dramatically increased. Simply put, the more users and interaction with your website that occurs; the more data that is available for collection and analysis.

Business Intelligence tools are nowadays more and more sophisticated; predictive analysis is becoming the norm rather than the exception. So the question becomes: How can you use information on your customers and prospects to personalise your offer – and make it stand out? Is dynamic pricing the way to go? 

  • Dynamic pricing is an old practice

As early as 2000, Amazon was experimenting with dynamic pricing: users were seeing a different price for the same item after having deleted their browser cookies. This was mostly used for loyalty purposes, existing customers were recognised and offered a better deal. The result, a feeling of being ‘special’ and an increased loyalty to the business.

  • Dynamic pricing can lead to stronger and quicker sales.

In the early 2000s, it became the norm, notably on airline websites. Customers with a very specific intent (a plane ticket between 2 cities on a specific date) were identified during their price hopping and this led to increased fare on their next visit.

The user, while this was not specifically the case, sensed an urge to book as an increased fee could mean there were fewer available seats. The sales process is complete and the margin is better.

  • Dynamic pricing is based on segmentation

The most important aspect of dynamic pricing is segmentation, you must understand your user base and know what they are interested in and which price they are ready to pay. The more segmented the better, as it allows you for further control and further personalisation.

  • Dynamic pricing can lead to a better margin

If and when your customer base has been properly segmented and analysed, specific demographics can be applied, notably in term of median household income. Asking prospects to enter their postcode (either when creating an account or during the sales process) can lead to identifying which suburbs are financially healthier and this can lead to a slightly different price, increasing your margin.

  • Dynamic pricing offers ways to beat competition

A business might compete nationally with other national businesses and at the same time with local retailers who can be more aggressive on prices. Again, when asking customers to enter their postcode, it allows you to align your prices on the competition, should this be your business model of course.

  • Dynamic pricing can be applied on patches

As a company, you do not have to apply dynamic pricing on your entire catalogue. You can however decide to run experiments and see what difference it can make.

Recently, the 2012 London Olympic Committee applied this strategy to maximise profits from the ticket sales. The same tactic was also applied by numerous Major League Baseball clubs on a few thousands of their stadium seats, with increased revenue of half a million dollars. It might or might not work for you; start by running a test and see the final numbers.

  • Dynamic pricing heavily relies on data analysis

Even at a smaller level, a free tool like Google Analytics can in its latest developments offer a professional level of data analysis to help you make sound pricing decisions

Use the Channel Contribution mode to figure out which marketing funnel initiated or brought the most sales; align customer behaviour data with your own CRM to identify visitors; run multivariate tests; track cross-platform visits under the new Universal Analytics model… The sky is the limit.

  • Dynamic pricing is widely accepted

Users have become familiar with ever evolving prices online, even on the same website and even during the same browsing session. They have accepted the fact that they will not pay the same price than the person sitting on the next seat in their flight.

Customers have been shopping around; using price comparison websites and sometimes different browsers/platforms to get a feel of what would be the lowest price for an item they are willing to buy.

  • Dynamic pricing is legal

As long as dynamic pricing is not discriminating users based on their sex, age, race, religion and other usual discriminative factors, it is perfectly legal.

Dynamic pricing has a bright future

Long will be the days when dynamic pricing was solely limited to online purchases. Trends for dynamic pricing in 2014 lie in retail. Products will see their price tag vary based on multiple factors and likely to be nearly individually set.

However, dynamic pricing is not ready for brick and mortar businesses, you simply cannot change a price tag in front of a customer or update it before he goes to the register. The key here resides in tailoring promotions and discounts, rather than the item price itself.

The long and the short of it is that dynamic pricing has been around for a long time now and it’s only getting more and more advanced. From profile to taste, needs and aspirations, it allows a better price shaping for an increased margin. It is however becoming a topic for retail shopping as well. And this is where the present and future of dynamic pricing resides:

Being able to identify and target specific customers on an individual basis and offer them a product they want, they can afford, and that they need at that exact moment, will possibly change retail forever.

However, the whole dynamic pricing model does imply two major changes:

  • 1. The business will need to be ready to adapt prices on the fly, sometimes multiple times a day, no more fixed prices for everyone. This flexibility will be the key to success.
  • 2. Customers will have to adapt to ever changing prices. Some customers will win, some will lose; and as a business you need to be ready for managing this important behavioural change within your customer base.

Even if price plays an important role in the final purchase decision, this is just one of the factors customers take into account when deciding on a purchase. Things like shipping, customer service, and convenience all play a part in the equation. At the end of the day, don’t put all of your eggs in the same basket and make sure you never veer from your businesses core values or initial goals.

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By Expert commentator

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