Product pricing strategy is a crucial aspect of a business that directly affects inventory, sales and profitability. If a business sets prices too high, customers might choose to buy your competitors products, while low prices may lead to other implications including less revenue.
A dynamic pricing strategy is a type of price discrimination that tries to find the optimum price point at any time. Price changes can be based on the perception of how much a consumer is willing to pay at a specific time for an item, competitors pricing and other variables. Retailers implement this at both physical and eCommerce stores. Sounds good right? But what about the disadvantages of dynamic pricing? Can using it hinder your pricing efforts? We take a look at the advantages and disadvantages of using dynamic pricing.
Dynamic pricing advantages
Although seen as a way for businesses to increase prices, an advantage of dynamic pricing can actually be used to lower prices too. There are times when a lower price can convert to more sales, helping a business meet its sales target for a period of time.
If competitors are offering goods or services at a substantially higher price, then a dynamic pricing strategy can be used to maximise profits. You can adjust the price of items based on the shopping patterns of potential customers. Take for example a customer wants to purchase a pen. Your competition sells pens at $3 each, while you sell them at $1 each. Dynamic pricing strategies would let you sell that pen to the customer who is shopping around at a price of $1.50, giving them the perception that they’ve saved money.
Create higher levels of demand
It is often used at events because open seats mean lost revenue. If on the day of the event and seating is still available, it may be offered at a lower price to some customers. That allows you to still maximise profits, giving you access to whatever revenues may be available at that time. This process is adopted in the hotel industry, transportation, and other industries where demand levels can be highly variable.
Allow pricing to reflect demand
Imagine you grow strawberries for a living. During the summer months, they’re much easier to grow because there is ample sun and rain. That means it costs less to produce the crop, and you can pass these savings onto your customers. But in winter months, you’re restricted to your greenhouse. You have to pay for extra light and water, as well as the cost of the greenhouse. With dynamic pricing, you can adjust the cost of your products to reflect the extra work required to bring them to the market.
Dynamic pricing disadvantages
Customers do not like it!!
Customers accept that prices change but they hate it when they are targeted by a dynamic pricing strategy. Even though it can be used to save money, it is often used to boost the margins of the business instead. That means customers feel like they’re being overcharged. In fact, if customers find out others paid way less, they become further disgruntled causing customer alienation and affecting customer loyalty.
Many customers use the internet to research products or services well in advance of a purchase. If they call, go into a store or browse through the web and a product is priced higher than what they expect, then they’ll just go somewhere else to make their purchase.
Gaming the system
Savvy shoppers have figured out that dynamic pricing models are often used online. They know that if they shop around too much for a specific item, the cost of that item might increase. That has led to an increase in using private browsers for product research, limiting the amount of information that can be collected through this process.
A business may lower the price of its products, which causes its competitor to lower it even further. This process continues until one business reaches a point where they cannot sustain themselves at the artificially low price. Take grocery price wars as an example.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.