During the COVID lockdowns, millions of people found themselves shopping online for everything from daily groceries to electronics. Shoppers soon discovered the ease of scanning the web to locate the most attractive offering in a matter of minutes.
As a result, pricing became an even more essential component of any brand looking to stand out amongst a growing plethora of options. This trend towards e-commerce has continued into the post-pandemic era, and the need to offer competitive pricing options to increasingly savvy customers has not disappeared.
Dynamic pricing stands out as a core capability that any smart retailer should aim to develop in this high-pressure environment.
Dynamic pricing is a strategy that involves adjusting the prices of your products or services in a disciplined and frequent manner, based on real-time shifts in demand and supply conditions. Typically this means raising prices during periods of high demand or low availability and lowering them when demand is lower or supply is abundant.
While it’s a well-established practice in the travel industry for airline tickets, hotel rooms, and ride-sharing services, as well as amongst several large e-commerce giants like Amazon, dynamic pricing is not a strategy which smaller retailers should dismiss as being out of reach.
By combining analytical tools like ShopGrok with a structured, predetermined set of pricing rules, retailers can regularly make price changes for specific products frequently enough to optimize price perception and margins without it becoming an manageable task.
Despite the clear competitive advantage dynamic pricing offers, a surprisingly few number of omnichannel retailers have fully developed this capability. Here are a few tips for retailers looking to expand their capabilities:
Consider Product Perception. Dynamic pricing should take into account the differing customer expectations for each product category. With some SKUs, such as seasonal or trending fashion items, customers expect to see more frequent price changes, whereas others, like basics (e.g. plain T-shirts or underwear) are expected to remain more stable. Understand the purchase cycle and consumer expectations for each product set. Price changes should align with customer perceptions to avoid any backlash. By tailoring your dynamic pricing strategy to match customer expectations, you are more likely to maintain their trust and satisfaction.
Embrace Data-Driven Decision Making. Data is your most valuable asset when it comes to dynamic pricing. To effectively implement dynamic pricing strategies, you will need to invest in robust data analytics tools such as ShopGrok to help you understand customer prices, range, market trends, and integrate automated price matching systems onto your ecommerce platform. It is important to invest in a tool that you can trust to consistently deliver accurate matching, as any slip ups could end up damaging your hard-won price perception.
Continuously Monitor and Optimize. Dynamic pricing is not a “set it and forget it” strategy. To stay competitive, you need to monitor market conditions, competitor pricing, and customer behavior in real-time. Implementing automated pricing tools that can respond swiftly to changes in demand and supply is one way to relieve some of the pressure. However, it is vital that you still regularly evaluate the effectiveness of your pricing strategies and gather feedback from customers. Analyze the impact of pricing changes on your sales, margins, and customer satisfaction. Use A/B testing to compare different pricing strategies and identify which ones yield the best results. Continuously refine your pricing rules and algorithms based on these insights. As the retail landscape evolves, what works today may not be as effective tomorrow. Therefore, a commitment to continuous improvement is key to mastering dynamic pricing.
Maintain Transparency and Trust. Sudden and unpredictable price fluctuations can alienate customers and harm your brand’s reputation. Therefore, communicate your pricing strategy clearly to customers. Notify them about upcoming sales or price changes in advance through email newsletters or on your website. Additionally, consider offering price guarantees to assure customers that the price they see is the price they’ll pay, even if it changes before delivery. Building trust with your customers is essential for long-term success in dynamic pricing.
Prioritize the Total Cost, Not Just the Item Price. A McKinsey article highlighted that shoppers base their purchase decisions on the total out-the-door price, which includes taxes, shipping costs, service charges, and any additional fees. An effective dynamic pricing strategy must incorporate all of these variables as well as the ticket price to achieve the desired effects. The McKinsey consultants used the example of a furniture retailer client who was able to achieve additional conversions by algorithmically offering customers the option to delay their shipments until the weekend. The logic was that customers purchasing large furniture items didn’t necessarily want bulky items delivered mid-week, and therefore longer wait times didn’t significantly affect conversion rates. After validating this hypothesis with data insights, the company adjusted its strategy to prioritize lower shipping rates. In this case, considering the customer’s total item cost is what helped to deliver more sales.