Why dynamic pricing is a must for e-commerce retailers

Imagine you’ve been looking for some ski pants because you are planning a winter getaway in December.

Since you still have some months ahead for it, you saved them on your wish list to buy them later.

But in November you visit the store again to buy them and you now realize that instead of $40, they’re now $60.

It’s not only that store; every other one has raised their prices too.

That must have happened to you, right?

Relax: you’re not alone. It’s not random; a dynamic pricing strategy is responsible for it.

A very common pricing strategy you should be implementing right now if you’re running an e-commerce (and if you want higher sales and profit).

Would you like to know how to implement it?

Keep on reading for some advice. 😉

👉 What is dynamic pricing?

Let’s start from the beginning. What is dynamic pricing?

Simply put, it’s a strategy in which the price of a single product varies according to different factors.

This is important because when it comes to setting the price of their products, many online stores only take into account the profit margin.

If the provider sells them a product at $30, they sell it at $45 (which gives them a $15 margin) and that’s the price they maintain throughout the year.

But by doing so, they’re not considering:

• Competitors.
• Supply and demand.
• The time of the year.
• The conversion rate of certain products.

If you take all of this into account, you can start modifying your pricing strategy and therefore maximize sales.

You’ll see why now.

👉 5 ways of applying a dynamic pricing strategy in e-commerce (with examples)

Let’s go over different ways of applying dynamic pricing.

✅ 1. A strategy based on a competitor’s price

Let’s suppose you’re selling a laptop at $800; the same price as a competitor.

But, at any given time, one of the big ones such as Amazon, decides to put that laptop on sale for $650.

If you haven’t been following up on your competitors, it’s likely that you’re losing money without even knowing. Those who could have been your buyers, don’t hesitate for a second and go directly on Amazon to buy that laptop the second they see how much cheaper it is. 

That’s why it’s important to monitor your competitors and control: 

• Prices
• Discounts
• Offers
• Product catalogue

For example, take a look at the results we get when we look up this specific laptop.

Only by taking a look at the ads on Google Shopping (one of Google Ads features) we see that the prices don’t change a lot from one store to the other. It’s likely that they’re “spying” on each other to adjust their sale prices according to the strategy implemented by their competitors.

However, you don’t always have to “lower the bar” according to your competitors’ standards. 😉

✅ 2. Pricing based on perceived value

When we talk about outselling your competitor, the first thing that comes to mind is selling cheaper products.

And even if in some cases that can be a good idea, if you position yourself as the cheapest store from your sector, it will end up wiping out your profit.

A pricing strategy based on perceived value allows you to do the opposite: sell more, even at higher prices.

Let’s review something first:

Perceived value is the amount that customers would be willing to pay for a product according to their perception of it.

This means you can increase a product’s sale price if the customer perceives that the product is worth it.

So how can we maximize perceived value?

• With good copywriting: clearly showing the user your product’s benefits. Good copywriting can make the customer better understand how this product will solve their need (and therefore they perceive it as more valuable).
• Through your brand: if you own a strong brand, you are in a good position to set a higher price. A clear example of this are brands like Apple, whose loyal audience is willing to pay their prices (even if they are higher than their competitors’). Here’s a guide to boost your e-commerce brand image.
• By offering a better service: even if you’re selling a more expensive product, the customer will be willing to pay more if they are sure you’ll solve their doubts and offer them more favorable conditions than your competitors do (a flexible return policy, guaranteeing that the product will arrive in good condition, etc.). In general, it’s about offering the customer the best possible user experience.

Rituals is a good example of this.

Their beauty and wellness products have a much higher price than the sector’s average. Check out this scented candle for almost $30.

On the product card, they highlight the product’s relaxing benefits: aroma and soothing natural ingredients.

Besides, Rituals has a strong brand that has positioned itself for selling a high-standing lifestyle. 

Under different circumstances, you might have found it expensive to pay $30 for a candle. But their customers perceive that what they’re buying is worth that price.

✅ 3. Product-bundling strategy

Closely related to the previous point.

Product bundling consists in offering a product pack in order to increase perceived value.

The pack’s price is usually lower compared to buying all the products separately (but this isn’t necessarily the case always).

An example of this can be the beauty products packs sold by Yves Rocher.

This pack includes a full-face care kit:  night cream, day cream, and eye contour. Not only does it offer the kit at a reduced price, but it also adds a full “anti-aging” pack, instead of having you decide which products to buy.

✅ 4. Time-based strategy

Surely, you’ve noticed that as time passes and newer versions of a certain product are released, the older ones become less expensive. This happens with mobile phones, kitchen processors and even sport shoes.

You’re also aware of the fact that a swimming suit doesn’t cost the same in summer or in winter, just as in the ski pants example.

So, a time-based price-setting strategy consists in modifying the products’ prices depending on:

• How long it’s been out in the market: the more it’s been out, the cheaper it is. Even in clothing stores, new collections tend to be more expensive. After some months, the collection will have lost momentum and prices will be lower.
• The time of the year (a given season or a special day): on Valentine’s Day, flower arrangements tend to be pricier. You also get the opposite; on certain days, prices are lower. For example, on Book Day, libraries usually offer discounts to encourage customers to buy.

Have you written down the “special days” of your sector?

We recommend that you do so and try to provide offers or exclusive packs on these dates to see how your audience reacts.

✅ 5. Market penetration strategy

Are you adding a new product to your catalogue?

Then maybe you’re interested in trying out the new market penetration strategy.

The idea is to sell this product at a lower or “launching” price in order to assess your customers’ interest.

If you see it’s highly demanded, you order more units. In time, as the product becomes more popular, you’ll get to increase its sale price.

Another way of applying this strategy is offering the product at a reduced price only to a segment of your audience; for example, to your subscribers. That way, you’ll get customer reviews, which —as you know— help improve conversion. 

Some businesses even offer a discount in exchange for reviews published by users.

For example, animal feed brand Hill’s Pet offered a $2-$5 refund when buying a bag of their new feed for dogs and cats (Science Diet) in an effort to increase the brand’s popularity. 

👉 Are you applying any of these dynamic pricing strategies?

You’ve seen how powerful dynamic pricing strategies can be.

Bear in mind; if you overuse them, they can become a double-edged sword. Sooner or later, your user will end up noticing.

This doesn’t mean “don’t use them” but “do it moderately”. 

Above all, remember to always offer the client quality service and a good shopping experience.

That, combined with strategies such as dynamic pricing, will be the key to your success. 😉