Flexible pricing: Increase sales

Pricing depends on supply and demand. Dynamic pricing uses flexible prices instead of fixed prices, changing them in real time based on competitors, demand, period, costs, geolocation of buyers and other factors. The popularity of the static price model until the 1980s indicated that the cost of goods and services remained constant regardless of supply and demand.

Airlines were the first to use dynamic pricing, changing ticket prices based on demand. Later, this practice was adopted by the hotel business.

In the 2000s, the dynamic model began to be applied in the field of e-commerce and retail, optimizing prices with the help of automatic technologies. With the growth of Internet trade, small entrepreneurs also actively began to monitor the prices of competitors and adapt the price of their goods to them. Thus began a new era in Internet marketing — the era of dynamic pricing.

About prices and pricing: how the value of goods depends on market conditions

The price of the product is defined as the amount that the buyer pays for it. It is an important factor influencing the buyer’s decision. The minimum price of the product is formed taking into account the cost price, which includes the costs of production, logistics, packaging, taxes, commissions and other costs related to the sale.

Let’s look at the examples of which pricing methods are typical for the dynamic model:

Temporary pricing

Seasonal pricing is when businesses change their prices depending on the month, year, or season. Example:

• Airline prices usually increase during holidays due to increased demand.
• Stationery can be more expensive in August and September, when demand increases before the start of the school year.
• Products with a short shelf life are often sold at discounted prices to entice customers to purchase quickly.

Segmented pricing

Segmented pricing involves setting different prices for the same product for different groups of buyers. Enterprises take into account such criteria as age, place of residence, profession and income level:

• For example, an airline may introduce a promotion for students, as this group of buyers tends to have a lower income.
• In large cities with a high level of income, the price of a product may be higher than in other regions.
• In the online store, the product can be cheaper than in ordinary stores.

Peak pricing

Peak pricing uses information about competitors, such as the availability of goods or services. Example:

• Prices may be higher if competitors have limited or no offer of a similar product.
• Uber raises fares for rides from time to time when there aren’t enough drivers available in certain areas.

Competitive pricing

This is when the price of a product or service is set in accordance with market prices and prices of competitors.

Businesses can set prices:

• Higher than competitors’ prices to show the superiority of your product or service.
• Lower than competitors’ prices in order to attract more customers by comparing several offers.
• At the price of competitors to avoid losses.

New companies can use a market penetration strategy by setting low prices first and then raising them as brand recognition increases.

Wholesale pricing

Companies provide discounts for bulk purchases. How to set the right prices to increase sales and make a profit?

• Retailers offer “1+1=3” bundles that encourage customers to spend more.
• Travel agencies offer package deals that include flight, accommodation and car rental at reduced prices compared to individual services.

How to implement dynamic pricing

#1. Consider whether a dynamic model is suitable for your business?

Dynamic pricing can increase profits, but it’s not for everyone. For example, restaurants and many manufacturers keep prices static, regardless of the circumstances.

Here are some questions to help you determine if dynamic pricing is right for your business:

• Can you tell when and how demand changes? Without this information, you will not be able to adjust prices effectively.
• How will your customers react to variable pricing? Price changes can scare customers, especially if they are used to static prices.
• What is the rating of your company? Dynamic pricing can increase sales if you already have a well-known brand.
• What are your expenses? Calculate whether the new prices will cover your marketing, logistics and rental costs.
• Are your competitors using dynamic pricing? If so, this may be a signal that this strategy is working in your industry.

#2. Define the business objective

Getting started with dynamic pricing is easier when you have a clear goal in mind. Think of your goal as a compass that will guide your actions and decisions.

First, identify the pros and cons of your current pricing model. Think about what exactly you want to achieve by moving to flexible pricing. The goal can be:

• Increase in sales volume and profit.
• Increasing brand awareness.
• Attracting new customers.
• Expansion of the sales market and development of new segments.

#3. Choose a strategy

Once you’ve determined your business objective, you can develop a pricing strategy that meets your goals.

For example, if your goal is to increase brand awareness and increase profits, the high-low pricing strategy used by Amazon may be most effective. Its essence is as follows:

• Popular products are priced low to attract customers and increase sales.
• A high markup is set on low-demand products, which helps compensate for the reduced cost of popular products and increase profits.

This approach may seem counterintuitive at first, but when customers come for a popular product, they often buy additional, less popular items as well, helping to increase overall sales and profits.

#4. Set pricing rules

The established rules for pricing should be stable and include:

• A clear definition of which company’s goods or services are subject to dynamic pricing.
• Conditions under which the price will change (increase, decrease or remain unchanged).
• Use of appropriate algorithms and formulas for changing prices in various situations.

For example, in an online store, if the products are running out, you can set a rule: when the stock reaches X value, stick to the lowest price range among the three main competitors.

#5. Find tools to help you implement your strategy

There are many dynamic pricing tools that automate market analysis. Here are some popular options:

1. Price2Spy – cloud service for monitoring and automatic adjustment of prices in online stores. Provides tools for collecting, analyzing and managing data, as well as a module for instantly adapting prices to market changes. A free 30-day trial is available.
2. Competera – a platform that offers automatic adaptation of prices to external and internal factors. Provides information about competitors: their prices, promotions and other marketing activities. A free trial version is available for new customers.
3. RoomPriceGenie – service for pricing rooms in the hotel business. Optimizes room rates by monitoring competitor data and booking performance to maximize profits. There is a free 14-day trial for you to familiarize yourself with.

#6. Test and adjust

Testing will help ensure that you have the right dynamic pricing set up to support your business goals.

If you find that using a dynamic model does not produce the expected results, make adjustments and keep testing until you find the most optimal solution for your business.

Advantages анд disadvantages of a dynamic pricing strategy

Should you use a dynamic pricing system? How can it affect business development?

Advantages of dynamic pricing

By tracking fluctuations in supply and demand, you can ensure that your prices are relevant and your sales are high. According to McKinsey & Company (USA) analysts, the introduction of dynamic pricing helps increase sales by an average of 2-5% and profits by 5-10%.

Other benefits of flexible pricing:

• Increasing the profitability of investments: dynamic pricing keeps your prices competitive, helping to increase conversion rates and ROI.
• Advantage over competitors: you will always be aware of their prices and marketing offers. The right use of a dynamic pricing model can help you dominate the market.
• Increase sales during downtime: dynamic pricing can save the day during periods of low demand. Offering off-season sales and discounts can attract more customers and increase revenue through sales volume.
• Study of customer behavior: automated pricing services allow you to better understand your customers. You will learn how often they shop, what price they are willing to pay, and what products or services they choose most often.

Disadvantages of dynamic pricing

• Customers may feel cheated and lose trust in your company. Price jumps can frustrate them and encourage them to look for alternatives in other companies. This can have a negative impact on your company’s reputation and loss of customers.
• Implementation of dynamic pricing requires significant efforts and costs. This includes complex mathematical calculations, development of tools and resources to automate the process. This can lead to additional financial costs for your company.
• Dynamic pricing requires accurate demand forecasting, which can be difficult in volatile market conditions and dynamic changes in consumer behavior.
• When using dynamic pricing, companies can lose control over the prices of their products, which can negatively affect their profitability and stability.

Sincerely, Skyservice POS!