E-commerce Dynamic Pricing: Definition, Examples & Benefits

Static prices might have worked in the past but it is not the best approach for modern online markets. You need to embrace e-commerce dynamic pricing to stay afloat. Your competitors are probably already doing it, so being stuck with a rigid pricing model could put you at a disadvantage.

Now all this might sound complicated, but with our guide, it doesn't have to be. We will break down exactly what e-commerce dynamic pricing is and explore how it works. We will also look at different strategies you can implement and discuss the exciting benefits it offers.

What Is E-commerce Dynamic Pricing?

E-commerce dynamic pricing is a strategy where product prices automatically adjust based on real-time factors like competitor pricing, customer demand, inventory levels, or even the time of day. Sophisticated dynamic pricing algorithms analyze this data and set prices that can maximize profits or sales depending on your goals.

How Does An E-commerce Dynamic Pricing Algorithm Work?

Let’s see how these clever programs work behind the scenes to determine the perfect price for your products at any given moment.

1. Gathers Information From Various Sources

At this stage, the algorithm gathers information from different sources to understand the complete picture. The algorithm constantly updates its data streams to ensure it is working with the latest information. Here are the key areas it explores:

• Internal Data: The algorithm examines past product performance. It can include price fluctuations, purchase rates, and inventory levels.

• Customer Behavior: It analyzes how people interact with your products. This includes how often people view a product, how long they look at it, and if they add it to their cart but don't buy it.

• Competitor Data: The algorithm constantly monitors how much your rivals are charging for similar products. It analyzes competitor websites and uses web scraping tools for this.

• Market Data: The algorithm considers broader market factors. Economic trends, seasonality, and even weather influence customer buying habits.

Manually collecting and analyzing all this data can be a very time-consuming and resource-intensive task. Lucky Orange provides a comprehensive suite that integrates with your existing systems to gather valuable customer behavior data. 

With Lucky Orange's Heatmaps, you can visually see which products resonate more and how customers interact with pricing information.

You can also watch real recordings of user sessions for a deeper understanding of customer decision-making processes. This can reveal hesitation points related to price or confusion regarding product value. Lucky Orange lets you easily deploy targeted surveys to gather direct customer feedback on pricing strategies and product perception.

2. Analyzes Data For Patterns & Trends

The algorithm then uses sophisticated analytical techniques to build an ideal price point for each of your products at any given time. Here's what it is looking for:

• The algorithm analyzes sales history to identify periods of high and low demand for your products. 

• It examines how your customers react to your pricing adjustments and determines how sensitive your products are to price fluctuations. This helps you gauge if you can raise prices without hurting sales.

• The algorithm evaluates competitor data to identify pricing strategies that are working well. It can then recommend price adjustments to capitalize on gaps in competitor pricing.

3. Sets A Base Price

Now the algorithm sets a base price for each product. This isn't the final price you will see, but it acts as a foundation for the dynamic adjustments to come. The algorithm looks at past average selling prices for similar products. Or it can use a pre-defined pricing strategy you have set. We will discuss these strategies a little later in the article.

The algorithm can also consider the MSRP as a starting point but it won't blindly follow it. Market data and competitor pricing will also play a role in the final price. This gives the algorithm a baseline price to work with.

4. Considers & Evaluates Different Factors

The algorithm takes the base price and considers several factors in real-time to recommend the optimal prices for each product. Here's what it takes into account:

• Seasonality

• Inventory levels

• Market conditions

• Competitor pricing

• Demand fluctuations

• Customer segmentation

• Promotions and discounts

• Pricing strategy and goals

• Supplier costs and availability

• Consumer behavior and purchasing patterns

• External factors (e.g., economic conditions, regulations)

5. Determines The Optimal Price Based On Factors

The algorithm doesn't treat all factors equally. You can set priorities based on your business goals. For example, if maximizing profit is your top priority, the algorithm gives more weight to factors like demand fluctuations and competitor moves. On the other hand, if you are looking to clear out inventory or attract new customers, those factors are prioritized.

You might have minimum advertised price restrictions from manufacturers or minimum profit margins you need to maintain. The algorithm factors in these constraints too. This ensures the recommended price meets your business requirements.

6. Implements Price Changes

Once the algorithm determines the optimal price, dynamic pricing solutions can directly update the product listings on your website in real-time. You can also choose to set some rules.

For example, with an automatic repricing tool like Aura, you can set maximum or minimum pricing rules that the algorithm can't exceed without your approval. Its AI-suggested price never dips below your desired profit margin or skyrockets beyond a price point you are comfortable with. This helps maintain control over the final price points.

7 E-commerce Dynamic Pricing Strategies

Let’s look at 7 dynamic pricing strategies to keep you competitive and maximize your profits.

I. Time-Based Pricing

This strategy is based on the concept of "peak hours" and "off-peak hours". It helps optimize revenue throughout the day, week, or even year. To give you an idea, time-based pricing can increase product demand by 20%. 

With this strategy, you can:

• Charge premiums during peak hours. Make the most of customers’ willingness to pay during busy periods.

• Offer discounts during slow hours to increase sales. This makes customers want to buy and keeps inventory moving.

• Implement flash sales or limited-time offers to encourage impulsive purchases and clear out aging inventory.

• Run seasonal promotions. Adjust prices based on holidays, back-to-school periods, or other seasonal events.

Let’s take an example of this meal-planning app. While other businesses use time-based pricing, their needs are more complex (seasons, holidays). For this business, the cycle is more predictable (weekly) which allows for a more targeted and impactful time-based pricing strategy.

People's diets and cravings can shift throughout the week. Someone sticking to a strict plan on weekdays might crave more flexibility on weekends. 

During weekdays between traditional lunch (12 pm - 1 pm) and dinner times (6 pm - 8 pm), it could introduce a slight price increase on their subscriptions. This captures customers who are signing up to use the service for immediate meal planning for the week.

On the other hand, they can offer a small discount for subscriptions purchased on evenings (after 8 pm) and weekends (Saturday & Sunday). This gives users who might be browsing and planning for the upcoming week more flexibility.

The business could also offer limited-time discounts on specific holidays or events. For example, a one-week discount to encourage meal planning for a long weekend or a holiday dinner.

II. Demand-Based Pricing

This strategy adjusts prices based on how popular a product is at a specific moment. Here's how:

• If a product sells quickly, raise its price for higher profit margins. 

• For products sitting on shelves, lower prices to generate sales and free up storage space.

• Initially set a high price point for new, in-demand products. Gradually decrease prices as the market matures.

Most businesses typically experience a fairly predictable demand even with seasonal spikes around holidays. But for this particular wholesale ingredients and chemicals distributor dealing with volatile ingredients, demand-based pricing is a must to deal with sudden shifts in demand. 

The business deals with ingredients used in various industries – nutraceuticals, food & beverage, cosmetics, etc – and each industry experiences its own trends and seasonal demands. The business faces the same issue on the supply side.

So supply and demand fluctuations for specific ingredients are more frequent for this business. With demand-based pricing, the business can create a dynamic system that benefits both the supplier and its customers.

Say, if the supply of a specific botanical ingredient decreases because of a bad harvest, Vivion could use demand-based dynamic pricing to adjust its price point accordingly.

Similarly, certain ingredients might experience temporary surges in demand because of new product launches or trending health fads. Vivion could implement demand-based pricing to slightly increase prices for these in-demand items.

III. Segmented Pricing

This strategy personalizes pricing for different customer groups. You can segment your audience based on several factors and offer them targeted pricing. Here are ways to do this:

• Attract new customers with special introductory offers or welcome discounts.

• Reward loyal customers with exclusive pricing or tiered discounts based on their purchase history.

• Adjust prices slightly depending on whether a customer is browsing on a mobile device or a desktop computer.

• Regain lost sales by offering a discount to customers who abandon their shopping carts.

• Use SWOT analysis to find any weaknesses in your customer segmentation that could hinder progress. For a starting point, check out the SWOT analysis templates on this page.

Compared to other niches with broader customer segments, this sports nutritional supplements company deals with a more specific customer base. Athletes and fitness enthusiasts have varying needs and budgets. A professional bodybuilder requires different products than a casual gym-goer. 

The business can offer tiered pricing based on a customer's experience level to cater to different segments. Beginner athletes are more budget-conscious. They are open to trying smaller sizes or sample packs at slightly lower prices. 

Seasoned athletes who regularly use specific supplements could be offered bulk discounts or subscription plans with recurring deliveries at a reduced cost.

The business can also segment pricing based on these needs. For example, pre-workout supplements might have a premium price point because of their specialized ingredients. On the other hand, basic protein powders could have more competitive prices to attract a wider audience.

IV. Competitor-Based Pricing

Use your competitor's pricing as a benchmark to set your own to increase your sales by 47%. Here's how you can use this strategy:

• Regularly track how your competitors price similar products. You can hire virtual assistants from talent scouting platforms like Genius. They will connect you with top talent who can help you gather data from various sources, like competitor pricing websites, customer behavior on your store, and market trends. These VAs can then organize and analyze this data to identify patterns and opportunities for dynamic pricing.

• If a competitor has a lower price, you can match it to stay in the game or undercut it to win the sale.

• If you offer a higher quality product or have a strong brand reputation, keep a slightly higher price point than competitors.

Let’s consider the example of a dog food e-commerce platform. Selling dog food online is a competitive market. Customers are constantly comparing prices and brands. They can use automatic software tools to constantly scan competitor websites and alert them of any price changes.

For premium dog food brands, the platform can monitor competitor pricing and keep their own prices slightly lower. This makes their products seem like a better value. They can also show competitor prices next to their own for certain dog food items.

V. Dynamic Markdowns

This strategy uses real-time data to automatically adjust markdowns on slow-moving inventory. Here's how you can use it:

• Define rules for price reductions based on factors like time remaining in a sale, stock levels, or product proximity to expiration.

• Optimize markdown depth. Pre-set parameters so that the dynamic pricing software automatically adjusts the discount percentage. 

• Dynamic markdowns prevent race-to-the-bottom pricing. The system only reduces prices as much as needed to move inventory.

Here’s how a business selling yoga mats and other equipment can use this strategy. Yoga trends can shift, and what is hot one season might be yesterday's news the next. Dynamic markdowns can help clear out slow-moving seasonal items like brightly colored mats or water bottles with motivational quotes.

Also, yoga studios can experience dips in attendance during specific times. The business can use dynamic markdowns to offer temporary discounts on yoga mats, blocks, and straps during the off-season. This can help clear out inventory during slow periods and incentivize people to create their personal home yoga haven.

Sometimes, a perfectly good yoga block or strap gets lost in the shuffle. The business can use deep discounts to bring these forgotten favorites back to customers' attention.

VI. Personalized Pricing

This strategy takes customer segmentation a step further by customizing prices to individual customer profiles. While the main methods for personalized pricing are similar to segmented pricing, here are additional ways to do it:

• If a customer shows high interest in a product (repeatedly views it, adds it to the cart), adjust the price slightly to nudge them towards a purchase.

• Use customer purchase history and browsing behavior to send targeted email campaigns. This can include personalized discounts or limited-time offers.

Now in most industries, pricing often applies broadly. They cater to a wider customer base which makes it impractical to personalize prices. But for example, this online store for golf cart accessories deals with a niche market where individual needs and purchase history can heavily impact buying decisions. 

The platform can track website visitors who return multiple times without making a purchase. These potential customers might be offered a small discount or free shipping on their first order.

Then for a customer who recently bought new tires, the platform could send them emails with personalized prices on wheel covers at a slightly discounted price. Similarly, if the customer buys lift kits, the business can offer discounted Fender flares at checkout to create a convenient upsell opportunity.

VII. Bundle Pricing

In this strategy, you can group complementary products and offer them at a discounted price compared to buying them individually. Here’s how you can do it:

• Bundle slow-selling items with popular products to generate sales and free up storage space.

• Introduce new products by bundling them with best-sellers to increase visibility and adoption.

• Customers perceive bundles as a better deal so it makes them purchase more products.

To understand this better, let’s consider the example of this online store selling Deseret Biological supplements. Digestive issues can have complex causes, and people often need a combination of supplements. 

Other niches might offer bundle discounts on their products, but these cater to general styles, not individual needs. This industry needs to personalize bundles based on individual browsing behavior.

If a customer searches for probiotics and prebiotics for gut health, the business can offer a personalized discount on a bundle containing a probiotic supplement and a prebiotic fiber source. Similarly, after a customer buys a one-month supply of probiotics, the platform can offer a discounted bundle for a 3-month regimen. This helps increase post-purchase upsells.

3 Real-World Examples Of e-commerce Dynamic Pricing

Let’s check out 3 e-commerce stores to see how they use dynamic pricing and how you can adapt these strategies to your own e-commerce store.

A. Amazon

Amazon is a master of dynamic pricing. They use complex algorithms that consider a vast amount of data to adjust prices in real-time. Here are some tactics they use:

• If an item suddenly spikes in popularity because of a social media trend, Amazon raises the price slightly to capture increased customer willingness to pay.

• Inventory levels and customer buying habits heavily influence Amazon's pricing strategy. Prices can fluctuate based on stock availability and real-time demand data.

• Amazon analyzes your browsing history and purchase behavior. They offer you exclusive discounts on products you have shown interest in or adjust prices based on your past spending habits.

B. Walmart

Walmart is known for its everyday low prices. However, they also strategically implement dynamic pricing to maintain their competitive edge. Here are some ways they do this:

• Walmart offers tiered pricing for memberships like Walmart+. Members receive exclusive discounts or access to special offers.

• Walmart closely monitors competitor pricing, especially for popular items. They dynamically adjust their prices to match or undercut competitor deals.

• Walmart adjusts prices based on buying patterns. You will find lower prices on everyday essentials during off-peak hours or targeted discounts on seasonal items.

C. Alibaba

Alibaba, a giant in B2B e-commerce, uses dynamic pricing differently:

• Alibaba uses price drops to generate excitement and encourage quick buying decisions.

• For large B2B orders, Alibaba offers big dynamic discounts based on the order quantity.

• Alibaba adjusts prices based on the customer's geographical location. This is because of currency exchange rate differences and local purchasing power.

6 Proven Benefits Of E-commerce Dynamic Pricing

Now let's get down to brass tacks: what is actually in it for you? 

i. Increases Revenue

This guide on maximizing sales suggests many ways to help you sell more. While improving personalization, offering different payment options, and optimizing onsite experience remain the favorites, having a pricing advantage tops the chart. Dynamic pricing is the best way to go about it.

Dynamic pricing lets you maximize your sales potential. During peak buying times or for in-demand products, you can raise prices slightly to get higher profits. Discounts or flash sales on slow-moving inventory can make customers purchase.

Similarly, dynamic pricing can help recover lost sales. Offering a small discount to customers who hesitate at checkout can make them complete their purchase. You can also use dynamic pricing to strategically price new products. Start with a higher price to gauge initial interest, then gradually adjust it based on sales data.

ii. Give You A Competitive Advantage

Dynamic pricing lets you react quickly to changes in the market. If a competitor lowers their prices, you can adjust yours accordingly to stay competitive. This helps you maintain your market share and attract customers who are looking for the best deals.

The best part is dynamic pricing creates a perception of high value, especially when prices increase during peak demand periods.

iii. Provides Better Inventory Management

Dynamic pricing helps you avoid stockouts and overstocked items. When you automatically adjust prices based on demand, you encourage sales of slow-moving inventory when it needs a push. 

This reduces the risk of having to sell items at a deep discount later. Dynamic pricing also keeps your inventory fresh and prevents products from becoming outdated or damaged.

iv. Strengthens Customer Loyalty

Dynamic pricing lets you offer exclusive discounts or personalized pricing based on customer purchase history. This way, you show them you are committed to fairness and finding win-win situations. Remember, happy customers are your biggest advocate. They are more likely to recommend your store to others and leave positive reviews.

v. Helps React To Market Trends Instantaneously 

Sometimes, unexpected events can cause demand for a product to skyrocket. Dynamic pricing lets you raise prices to capture the increased value customers are willing to pay during these peak periods.

Similarly, economic downturns can impact customer buying habits. With a dynamic pricing solution, you can adjust prices to maintain sales volume during such times.

vi. Provides Pricing Flexibility

Dynamic pricing frees you from rigid pricing structures. You can create complex pricing strategies to run targeted promotions or discounts during specific times. This flexibility helps you create strong advertising strategies. You can offer the same promotions through ads displayed only to specific audiences who are more receptive.

Dynamic pricing also lets you test various pricing models to see what works best for your products and target audience.

Conclusion

So is e-commerce dynamic pricing a guaranteed win? Not necessarily. It needs to be approached with care. Push prices too high and customers vanish. Play it too safe and you leave money on the table. But when done right, it can transform your online store from a bystander to a go-getter.

Optimizing your dynamic pricing strategy requires understanding your customers on a deeper level. Lucky Orange comes with heatmaps and session recordings that help you visualize how visitors interact with your products and pricing. You can use it to experiment with dynamic pricing strategies and optimize your conversion funnel for maximum profit.
Try Lucky Orange for free today and see how customer behavior insights can make your online store more profitable.