Dynamic pricing 101: what you need to know in 2024. Real-life examples and benefits

Understanding Dynamic Pricing

Dynamic pricing, also sometimes called surge pricing, refers to the process of adjusting prices based on factors that constantly change. It can be time: when you adjust your prices to certain hours. It can be shoppers’ activity: for example, there’ve been rumours that some airplane tickets companies change the prices consumer sees depending on how many times they have done a search for a certain destination. In any case, with dynamic pricing your prices change based on some external conditions — contrary to traditional fixed pricing, where prices remain constant, or change based on the internal conditions (for example, when you decide to run a promo).

Why dynamic pricing

With dynamic pricing, businesses can swiftly adapt to market fluctuations and optimise revenue as well as their profit margin. Dynamic pricing can also be aimed at achieving a higher level of personalisation and delivering a better experience to the customer. In 2023 for some businesses, like Halfords, dynamic pricing also became a part of their competitive differentiation. Like every pioneer in the field, they have been using this narrative to deliver the message: “We love our customers, we’re eager to go an extra mile to offer them better prices".

In 2023 for some businesses, like Halfords, dynamic pricing also became a part of their competitive differentiation.

The Concept Behind Dynamic Pricing

At its core, dynamic pricing capitalises on the principles of supply and demand. When demand is high, prices increase. Conversely, when demand is low, prices decrease. The concept extends beyond just simple economics - it also considers

• customer behaviour,
• buying patterns,
• market trends,
• short-term and long-term goals of every single business (for example, to gain a bigger market share vs capturing more margin),
• and of course, the competitive landscape to determine optimal pricing.

Key Types of Dynamic Pricing

Time-Based Pricing

Businesses can set intertemporal rules (time-related rules) to manage pricing dynamically. For example, they can offer lower prices at certain times of the day, during specific seasons, or after the item has been in stock for X number of days. Think of Uber fares: you have to pay twice as much for a ride during peak hours.

Latest examples from retail

1. Stonegate pubs. Introduces dynamic pricing in 2023. Explained that their prices would go up during the rush hours.
2. Halfords workshops. Introduced time-based dynamic pricing in November 2023. Explained that they would decrease service fees during off-peak hours.

Benefits of time-based dynamic pricing

The research conducted in 2020 shows that time-based dynamic pricing can increase demand by as much as 20% during off-peak hours, therefore significantly increasing company’s revenue (up to 42%)

Competition-Based Dynamic Pricing

Without question, this is the most popular type of dynamic pricing, especially in retail. Monitoring and responding to competitor prices is a must in today's highly competitive world. The first thing that every eCommerce business should do is to consider the possibility of setting their prices relative to competitors'. The goal isn't always to make them lower, but to leverage hidden opportunities. For example, let's say your position in the market is #2. Why should you price your product 20 pounds less than the competitor who holds the #3 position? Couldn't you narrow that gap and offer a price that is, say, 2 pounds less? You'll still be #2, but you'll earn an additional 18 pounds from every item sold. To do this, you need to use a specialised software that can adjust your prices dynamically, like Aimondo.

Read more on competition-based pricing here.

Examples of competition-based dynamic pricing:

1. Most serious Amazon sellers would use it to make their prices more competitive.
2. Would be relevant to any multi-branded retailer selling similar items (for example, all shoe stores selling Nike shoes, or all DIY stores selling Bosch electric drills).
3. Would be relevant to all wholesalers and distributors selling comparable items. For example, all OctoParts sellers offering electronic interchangeable components.

Benefits of competition-based pricing

Multiple case studies and our own experience with eCommerce customers show that 21% increase in profit margin and 46-68% increase in revenue is very much achievable.

Segment-based dynamic pricing

This type of pricing is more advanced than simple time-based on competition-based. However, it is also very much programmable, as it is based on the idea that your prices changes when a certain event happens. In time-based pricing you change prices following the ticking of the clock. In competitor-based pricing you change prices following your competitors’ moves. In segment-based pricing you change prices following the way you group your customers.

You can refer to a more detailed article on customer segmentation in eCommerce here. However, this is a short outline of the idea: your customers can be attributed to a certain segment based on their purchase history and the analysis you’ve made.

Examples of segment-based dynamic pricing

• Simple segments

Age groups, locations, roles or behaviour. For example, shoppers who collected a certain number of scores within your loyalty program. They have purchased more than $10K from you. Or they have written >50 reviews on your products. They are entitled to a different tier of prices than everyone else. Used by companies: Shein (review-based prices), cinemas (age-based prices), Figma (offers special fees for educational institutions), Toom (Purchase power parity based prices where different regions of the country get different pricing tiers)

• Complex segments

Designed based on your analysis of a person’s purchase history and after comparing it with other shoppers you have attributed this person to a segment that you call “likely to be pregnant” and consistently offer them a discount on baby formulas and diapers because they are more likely to make this purchase.  Used by: Amazon (recommendations and emails).

• B2B pricing

B2B pricing is very often segment-based. If you’re serious about your quotes, you analyse seller's commitment to certain marketing activities, order size, history of interaction, then attribute them to a certain segment with associated predicted life-time-value, and offer them a distinct price for your goods that is different for all other segments. Used by companies: Michelin, Unilever.

Benefits of segment-based dynamic pricing

Benefits of segment-based dynamic pricing are easy to project. If you target different segments and have multiple price points the chances of achieving better sales results are much higher. The increase in revenue can reach 85-90%.

Combined Dynamic Pricing

In our practice, most retail companies that are serious about their pricing, use not one type of dynamic pricing strategy but a combination of them.

Examples of combined dynamic pricing strategies

1. For example, one customer’s strategy is to keep a certain market positions (competition-based pricing) within certain hours (time-based pricing).
2. Another big company is using a Purchasing Power Parity index to add to all their prices.
3. A third customer tracks reviews their competitors get on Amazon and adjust them accordingly: when product listed by competitors get lower reviews they increase their prices slightly. They do the same with delivery terms and conditions: when a closest competitor changes delivery time to a longer period, they also see it as an opportunity to add come extra cents to their products. At the same time, they use time-based prices on Idealo but not on Amazon.
4. A customer that we’re onboarding right now, is planning to track Google trends and monthly volume searches for a certain brand and offer additional discounts on items that apparently become popular. They also want to add a search history analysis feature to their website. This is very close to dynamic pricing used by airplane ticket companies and grouping customers by their search history.

How to implement dynamic pricing

Step 1: Set Your Pricing Goals

First, you have to decide what you want to achieve with dynamic pricing. It could be anything from increasing sales velocity and clearing old stock, to maximising profits on fast-moving items. Your goals might change in 3-6 months, but it’s important to understand what your primary needs are and how success would look like.

Step 2: Understand Your Landscape

You probably already know all your competitors. But just to be certain you’re not missing anyone, perform a thorough analysis of your market once again. Who sells the same brands? Who is perceived as your competitor by your customers?

Step 3: Analyse Your Costs

Ensure you have a good grasp of your cost structure. This includes both your variable and fixed costs related to the product. The aim is to make sure your dynamic prices will cover costs and ensure profitability.

Step 4: Select a Dynamic Pricing Software

This might seem like the least important thing on your list, but it might actually be the most important one. Think of it this way: your vendor will be your ship. If you choose a cruise liner to cross a local pond, you’ll overspend, and you'll feel that the space is too crowded and the captain of the big boat doesn't understand your needs. If you choose a tiny boat to cross the Atlantic — well, I don’t envy your fate. There should be a Task-Product-Fit (TPF). There are affordable solutions that you can use while selling on marketplaces (Amazon Repricer, Express Repricer, etc.). And there are complex, more elaborate tools that will require some effort from your tech team to arrange an integration with your ERP system. Because — let's be honest — you can’t call a manual price change performed by your managers once a month "dynamic pricing". Dynamic pricing is always automated — hence, the need to integrate dynamic pricing into your systems.

Step 5: Build Your Custom Dynamic Pricing Strategy

As soon as the integration is in place, you have to build your dynamic pricing strategy. Choose from one of the types described above.

Step 6: Launch POC Phase

In the tech world, POC (proof of concept) is the beginning of all projects. It means that you have to start with a limited number of items (up to 10K), instead of connecting all your assortment to your new dynamic pricing environment. A self-respecting vendor would offer you this option anyway. During the POC phase, you will have to track and analyse data meticulously, fix inconsistencies, and improve your strategies.

Step 7: Track Your Results

Make sure you have access to all necessary data: on-page bounce rate, engagement rate, conversions, the number and tone of reviews, etc. You will have to monitor all these data during the POC period to see how price changes impact your customer behaviour, your sales, and your profit margin (if this is what you’re after).

Step 8: Refine & Optimise

Based on the data you've collected, make necessary changes to your pricing strategies. Roll out the improved strategy on other categories.