Dynamic pricing proves popular with online retailers

August 26, 2014

Dynamic pricing models have been taking over the e-commerce world.

Dynamic pricing models have been taking over the e-commerce world.

The strategy, introduced in the 1980s by American Airlines, has allowed retailers to remain competitive while improving profits by 25 percent on average, according to eConsultancy. Dynamic prices gives companies the ability to to decrease prices in an effort to grow sales when business is slow, and raise product costs in better times to guarantee profits.

Companies such as Amazon have long been taking advantage of dynamic pricing models in order to alter product costs up to several times a day in order to stay ahead of the competition, Internet Retailer noted. However, it seems that new online retail companies are exploring dynamic pricing options for themselves.

In fact, two ex-Amazon employees recently raised $8.5 million in order to fund a startup called Boomerang Commerce that will help companies implement dynamic pricing, Geek Wire reported. The startup last month revealed its first product, the Dynamic Price Optimizer. Staples, Sears, Groupon Goods and RadioShack are already using the product.

“Price is a key factor driving online purchase decisions, and retailers need to continuously react to competitive price changes while keeping a firm eye on their profits,” Guru Hariharan, a co-founder of the company, told Geek Wire. “We are applying portfolio theory, real-time machine learning and game theory to this complex problem, enabling retailers to compete like never before. The proof is in the numbers; our customers have seen significant and immediate revenue and profit growth based solely on price optimization.”

Dynamic pricing has many advantages for retailers. Intelligent software that alters prices has been employed by 22% of retailers, eConsultancy reported. Within the next six months an additional 7 percent intent to start using it, and 36 percent in the next year.

360pi, a competitive price intelligence software provider, studied North America’s top online retailers in order to determine their pricing habits. The company found that the level of price variation differs vastly from company to company. Some would change prices on up to 20 percent of their inventory daily, while others maintained static pricing.

Amazon and Sears were the most frequent users of dynamic pricing, the study found. These retailers changes prices on between 15 percent and 20 percent of their products daily. Walmart was in the middle tier with between 6 percent and 8 percent, while Apple and Staples did not employ dynamic pricing.

It seems as though dynamic pricing is fast seeping into e-commerce pricing schemes.

“Daily price dynamism, including hourly price changes, will continue to play an important role in ongoing pricing but will be especially important in the 2014 holiday shopping season. We see amazing things happening with pricing every day as we gather information on millions of products from every corner of the Internet,” Jenn Markey, vice president of marketing at 360pi, said according to a press release. “When we look at how the prices for individual products change throughout the day, we are able to identify some interesting trends by category and retailer, including who tends to follow whom.”

The various dynamic pricing models
There are several dynamic pricing strategies that companies have begun to employ, according to eConsultancy. One such model is segmented pricing, in which companies tier products at different price schemes in order to attract a variety of customers – such as Apple’s iPhone 5c and 5s.

Another strategy mentioned by eConsultancy is peak pricing. This refers to price changes tied to demand. When demand is high the cost of a product will go up, and when it is low, vice versa. This is a good strategy for the holidays, the digital marketing and ecommerce company noted. Some companies micro-manage pricing even more, implementing time-based pricing – prices that change depending on the time of day.

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