How Dynamic Pricing Squeezes Every Last Drop of a Juicy Margin

If you want to pay fixed (or at least more stable) prices, then go to brick and mortar stores because retail assistants could never change those little shelf edge tickets as quickly as prices change online.

With dynamic pricing software, eCommerce prices can be programmed to change continuously, squeezing every last drop of juicy margin from customers and keep sellers one step ahead of the competition.

What is Dynamic Pricing Software?

eCommerce dynamic pricing software updates prices automatically, on a repeated basis, to ensure each customer pays the right price for the right product at the right time. Prices are adjusted according to factors Dynamic Pricingand market conditions like time of day, demand, location, competition, and customer buying patterns, maximizing revenue, and profit. It's economic theory brought to life.

But I'm happy with Excel. Really?

Truth be told, if you're still using Excel for pricing, you're missing the big picture. Because while it can just about handle cost-plus pricing, dynamic pricing and Excel don't mix. It's not humanly possible to digest data in every row of a vast spreadsheet, so we tend to focus on optimizing the top bit–the best sellers, the 20%–and ignore the long tail, the 80%–where the largest cumulative gains can be found.

Excel is slow. You have to download prices from your website, manipulate them offline, and then re-upload them to your website once more. Each manual stage wastes time and creates the potential for human error. Dynamic pricing software does it all for you, more effectively than any human pricing team could, and it works weekends, holidays, and pandemics!

If it's good enough for Amazon…

Amazon is the Michael Jordan of dynamic pricing, reportedly changing its prices 2.5 million times a day, which means the average product price changes once every 10 minutes. Prices can vary even after items have been added to the cart. Yes, it might piss off the odd customer, but Amazon's cool with it - it’s a small price to pay for a strategy that’s delivered global domination.

Amazon can use dynamic pricing to such devastating effect because it has such an insane volume of data. How much? Hard to say. But in a 2018 book, "Swipe to Unlock: A Primer on Technology and Business Strategy," co-authored by Google Product Manager Neel Mehta, the estimate was one billion gigabytes. Load that onto 500GB hard drives and stack them on top of each other, and the pile will exceed eight times the height of Mt Everest. One can only imagine how tall that stack would be now at the end of 2020.

Thanks to big data, Amazon has a firm grasp on its KVIs–known value items–the products that disproportionately drive value perception among customers. In a grocery store, the KVIs are eggs and milk. For Amazon, KVIs might be games consoles or TVs. These products lure customers in, create an overall sense of reasonable pricing, and encourage them to spend more on pricey peripherals and other things they never knew they needed. Strategically increasing prices of low-demand items to make popular alternatives seem cheaper is another strategy that Amazon has been accused of exploiting in the past.

Amazon’s dynamic pricing is so advanced that a mini-industry of Amazon price tracker apps has sprung up to help consumers navigate the peaks and troughs of this ever-changing pricing landscape. CamelCamelCamel is probably the best known and is definitely the best named.

The 10 (+1 Bonus) Biggest Benefits of Dynamic Pricing Software

Massive corporations like Amazon have spent billions of dollars developing dynamic pricing software and strategies that are now available to small- and medium-sized businesses for a modest investment. Companies get the best bang for the buck by implementing a CPQ (configure, price, quote) solution like KBMAx, which provides dynamic pricing alongside product configuration and sales and engineering document generation functionality. Benefits of dynamic pricing software include:

1. First and foremost, you can maximize revenue, profit, market share, or whatever you want from your pricing strategy.

2. You can ride the wave of seasonality as long as possible, adjusting prices incrementally to eek every last cent out of your busiest periods.

3. It can serve as an early warning system for problems coming down the pipe, such as overstock and understock.

4. It analyzes buying behavior, teaching you about customers’ habits and preferences, enabling you to better meet their needs and tailor products, services, sales, and marketing accordingly.

5. Price crawlers track and analyze competitor behavior, providing a deeper understanding of their strategies and motivations, showing you what to do and what not to.

6. You can eliminate human pricing errors. Never again will incorrect prices slip through the cracks and go live, resulting in lost revenue and awkward follow up calls.

7. It saves time, freeing employees from endless number-crunching, allowing them to concentrate on more innovative, strategic pursuits.

8. It can model pricing rules in different scenarios, showing you how pricing strategies will play out before risking them in real life.

9. It can predict future demand and price elasticity for each product and enhance decision-making through data-driven analytics, getting even better over time.

10. You can shape customer behavior by tweaking prices through different channels and locations, driving in-store traffic, or promoting new product launches.

11. The future of dynamic pricing lies in personalization. Dynamic pricing software can plot unique demand curves for each customer, tailoring buying experiences, prices, and offers accordingly.

Just Because You Can, Doesn't Mean You Should

If (comp_price>cost) and (promo_flag = false) then set price = comp_price*0.90

There are two significant risks inherent in dynamic pricing that need to remain top of mind. The first relates to competitors, the other to customers. If you happen to understand the standard pricing algorithm above, then it should ring alarm bells. It means: “If the competitor’s price is greater than the cost of making the item, and the competitor isn’t running a promotion, then undercut the competitor by 10 percent.” While beating competitors on price is no bad thing, how can you be sure they don’t have the same algorithm aimed at you? They probably do! And that can only mean one thing: a race to the bottom with no winner.

The other factor to consider is consumer trust. Specifically, how to keep it when your prices fluctuate all over the place and you could be charging one customer 10% more than another. Perceived price gouging can trigger a customer backlash from which it can be hard to recover. In some jurisdictions, dynamic pricing strategies can even be illegal. Companies walk a fine line between improving margins, retaining customer loyalty, and staying competitive. It's up to you to decide what you want to sacrifice.