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Dynamic Pricing Strategies to Maximize Revenue

Learn how to boost your revenue with effective dynamic pricing strategies. Optimize your pricing strategy and increase profitability with these tips.

Dynamic pricing is the practice of changing prices on products to respond to consumer demand.

The practice has been around for some time with Amazon being the most famous of the retailers that use a demand pricing strategy, also known as surge pricing.

Major retailers that range from brick-and-mortar sales to airline ticket prices use this pricing strategy in order to respond to demand for a product and rapidly increase or lower the price of a product in response.

Surge pricing is something that e-commerce sites of all sizes can take advantage of in order to maximize profits and purchase more stock going forward.

It also gives you more flexibility in controlling inventories, allows you to offer better pricing to your customers, and determine the best price point for a product.

On the surface, this sounds like price manipulation, something that's illegal as a general rule.

The fact is, a dynamic pricing strategy is legal and a valid pricing strategy that helps you sell inventory at different product prices and at different periods in time.

The burden of making the purchase is on the customer, as they always have the right to refuse the price in the form of not making a purchase. Read on to learn more about how dynamic pricing works and how to implement it for your e-commerce venture.

What is dynamic pricing?

Dynamic pricing is a pricing strategy that's based on internal and external influences such as the time of year, the strength of demand for a given product, availability of supply, and changes in wholesale pricing.

For example, major retailers use a dynamic pricing strategy to stay competitive with other retailers and can update different prices within minutes of discovering a higher or lower price.

The practice of dynamic pricing is mainly restricted to e-commerce as it's more difficult for a brick-and-mortar operation to raise prices quickly.

Price adjustments in a physical location are more likely to take place over days instead of minutes. E-commerce businesses that aren't already engaged in dynamic pricing should seriously consider implementing the strategy for the benefits it provides to the running of the business.

Why should businesses implement dynamic pricing?

Perhaps the biggest reason businesses should use a dynamic pricing strategy is the fact it helps them stay competitive.

When a business lowers or raises its prices, a competitor can quickly follow suit by setting their prices to a competitive price point within minutes. This also eliminates the need for price discovery, clears out seasonal inventory more quickly, and improves overall profitability.

Benefits of a successful dynamic pricing strategy

Businesses can benefit in many ways from engaging in a dynamic pricing strategy.

Not only does it improve revenues, but it also finds the maximum amount a user is willing to pay at a certain time of the year or when something is in high demand.

From pricing your products to creating a rate card, a dynamic pricing strategy gives your business a competitive edge while attracting more potential customers.

Improved revenue and profitability

Increasing prices to a higher price during a time of high demand enables you to maximize your profits and smooth out your revenue over time when you're in a seasonal business or selling a fad product.

The profits you realize from the increased revenue can be used in any number of ways ranging from increasing inventory to hiring more help when it's needed.

Increased customer satisfaction

Charging higher prices can seem counterintuitive to customer satisfaction, and it can to a degree.

However, customers are often willing to pay higher prices to secure the desired service or good that they seek. Customers who don't want to pay higher prices have the option to wait until the end of the season for a sale or when other influencing factors cause lower prices.

Gain a competitive advantage

One of the aspects of a dynamic pricing model is the act of tracking competitors' websites to find out what they're currently charging for a product or service.

You can respond by pricing your offering(s) slightly less or adding an incentive that encourages people to pay a little more for your product. The customer perceives the incentive as added value and is more likely to buy from you than the non-incentivized item from the competition.

Better inventory management

It's easier to control the rate at which you sell and restock your inventory with a dynamic pricing model. You can estimate future sales on the current rate of sales at a specific price point, and know how long your current inventory is going to last.

In the event you want to clear out your existing inventory, you can lower your price and have a good idea of how long it will take for your products to sell out based on historical sales.

Dynamic pricing-based strategies to maximize revenue

Dynamic pricing has different types of strategies that can be applied across different types of industries to increase revenues and meet operating challenges.

Also, keep in mind that it's never a bad idea to let customers know about a price increase via a notice or letter prior to implementing the change. This results in the loss of fewer customers and maintains good relationships.

Time-based pricing

This type of pricing works by increasing the cost of a block of time during periods of high demand, and charging less during off-hours.

Time-based pricing is most commonly found in the hotel industry but can be applied to other industries where there's a charge to occupy a space or location for a certain period of time.

Seasonal pricing

Seasonal pricing comes into play for industries that have prime seasons and off seasons.

Demand for a service or good increases during the prime season, and drops during the off-season. Prices rise and fall according to the season, but customers typically expect to pay more during the high season and less during the off-season.

Price discrimination

Price discrimination refers to the strategy of pricing the same item at different prices for different customers. This practice is legal as long as the prices charged reflect the realities of each individual sale, and aren't used for discriminatory purposes.

Real-time pricing

Real-time pricing, also known as dynamic pricing, is pricing a service or good at the current rate. Some examples include the cost of a single share on the stock market or a commodity at a given moment.

The prices that are paid reflect the price points of the items at the time of sale with little in the way of a price increase for a profit.

Surge pricing

Surge pricing is a price that's charged during periods of high demand. The period can be as short as a few hours, such as utility surge pricing, or it can last until demand from buyers fades out.

This type of pricing is primarily used in the energy industry and is implemented during times of peak demand for energy.

How to implement dynamic pricing

The way in which you use dynamic pricing depends on what you're selling, how you sell it, and if it's time-sensitive or not.

On a practical level, you can use POS software that monitors the competition for price changes and implement your own changes when the dynamic pricing software sends you an alert. Otherwise, you'll want to use nuance and sensitivity when determining your pricing strategy so as to not alienate customers.

One example of dynamic pricing is using a landing page that features a rate card for different types of services. The rate card represents all levels of customers while enabling you to charge more for services or goods at higher levels of service.

That is, buyers who want what you have to offer, but don't want to spend a lot of money, get charged the least amount, but get additional charges for extra services.

Meanwhile, more expensive packages have higher upfront charges but get charged less for extra services because they're paying more off the top.

This is true for just about any type of selling activity. You can use a dynamic pricing-based strategy if you're writing a website proposal that charges a base rate along with fees for certain services, or rolling the cost of most services into a higher base rate and charging less for extras.

It also works for selling products at higher costs for lower quantities and giving volume discounts for larger quantities.

Potential challenges of dynamic pricing

There are a couple of challenges that come with dynamic pricing methods such as alienating customers and pricing in a direction that causes sales to slow down.

Sometimes the two are connected, and sometimes they're not. It's true that dynamic pricing helps a business maximize profits, but care needs to be taken to price just right. Going too high without offering value only serves to alienate customers and send them looking elsewhere.

This is true of products with limited availability and high demand, as the consumers driving the demand have limits on how much they'll spend. Being insensitive to a dynamic pricing method can also result in a shrinking customer base that may not ever return.

Gain a competitive edge with dynamic pricing

Dynamic pricing is an excellent pricing strategy for businesses of all sizes, types, and industries.

It can deliver value to the customer by providing them with a service or product at a price point that works for their budget and needs, or give them the option to get what they want even when the price is higher. It also helps you control your inventory flow, improves profitability, and helps your business stay competitive.

At Mailchimp, we're here to help you find success in your business venture with our extensive resource library.

Not only do we lay out the various aspects of a dynamic pricing method for you to integrate into your pricing structure, but we also offer resources that cover every aspect of running a successful business. You'll find topics that range from marketing to building a website and more. The best part is that it's all free.

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