The price point has been the age-old arrow in the quiver of all companies. Price wars have been fought between conglomerates to retain their existing customers, dive into new markets, launch new products, capture competitors’ market share or even stir a buzz in the market.
The goals and targets of the company decide its pricing model and strategy.
In recent years all the e-commerce giants and the historically famous travel companies have resorted to a pricing strategy known as dynamic pricing.
It is defined as the practice of varying the price for a product or service to reflect changing market conditions.
An example of dynamic pricing can be seen in the changing prices of airline tickets. During festivals or in-season, the prices are generally higher and during the off-season, they taper down. The prices also change as per the date of booking the ticket and the seat preferences.
E-commerce companies like Amazon, Flipkart, Myntra, etc. also follow a similar strategy during the festive seasons, price bundling or substitution pricing.
This type of pricing strategy increases the profitability of the retailer and alters consumer perceptions.
Apart from algorithms and machine learning working in the background, this type of strategy requires the retailers to know their market, consumer purchase behaviour, brand image and supply chain capacity.
Here are a few things one needs to bear in mind when choosing a dynamic pricing strategy –
- Know your customer – Understanding the customer mindset and what works for them is crucial. If the retailer deals with goods like furniture, electronics, or other durable goods, then the customers are more price sensitive and prefer a stable ticket price for the products. Frequency of purchase, timing and maximum price the customers are willing to pay also plays an important part.
- Know your supply chain – In product bundling or when it comes to fast delivery options, it affects your supply chain. The SKUs, vendors and fleet need to be optimally managed to offer different prices to the customers or pass on the price benefit to the customers.
- Change the psychology – Brands often shy away from implementing dynamic pricing as it may hamper the image or customer perception. However, dynamic pricing may increase sales volume, help improve brand value and allow flexibility to stay profitable.
- Staying profitable in long run – In the long run, the companies can stay profitable due to such type of pricing because they will have collected several data points about their customer’s shopping preferences, price caps, purchase patterns, and bundling preferences.
- Understand the product – It is a common practice for the airfares to change constantly, however, customers do not respond well to changes in the prices of basic necessity items, durable goods or other expensive purchases. They prefer a steady rise in prices.
- Communication – Customers need to be made aware of the price changes and the revised prices should reflect on all the marketing communication platforms.
- Software – Many software are available in the market that assist retailers to decide the optimal price point, capture demand fluctuations, price elasticity, and decide the revision in prices.
In this rapidly changing world of retail and e-commerce, dynamic pricing is becoming a must-have capability for companies to survive and thrive in the competition.
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