The Art of Dynamic Pricing

We’ve all been there.

Imagine it’s raining outside and you forgot your umbrella at home. You stop by a kiosk to buy a cheap $5 umbrella only to see that the store owner boosted the price to $15. Despite the 300% price increase, you still buy it because circumstances dictate that you need it.

That’s dynamic pricing, and as a retailer, you can use it to optimize your prices and make significant profit gains, online or in-store.

What is a dynamic pricing strategy?

Dynamic pricing is when you change the price of a product or service based on an outside influence—like when Uber boosts rates during peak traffic hours. The biggest challenge to get started is determining which outside element will be the catalyst for your prices changing.  

Let’s look at a few ways you can get started and then make the most of your products.

1. Price based on customer purchase history

One retail dynamic pricing option is basing prices on a customer’s purchasing history. In other words, your prices adapt based on how much a customer has purchased from you in the past. This dynamic pricing option requires that you sell both discounted and regular price products.

After a customer buys a product, you should be able to save the sales data associated to that customer and determine if they’re typically a bargain hunter or regular price shopper.

Send the customers who regularly pay full price for products a set of marketing materials that emphasizes new products they might like—not discounts or promotions. Send promo codes and special deals to the ones who historically buy discounted products.

Tip: This dynamic pricing option also gives you plenty of room for other testing. For example, try marketing pricier products to the customers who typically buy full-price, and try marketing items you want to liquidate to the ones who buy things on sale.

2. Price based on demand

Another common strategy is to adjust the purchase price based on demand, which is also known as demand-based pricing. As a product reaches its peak demand, its price reaches a ceiling. This is especially useful for products that are taking a long time to reach their pique interest, like sandals or other seasonal products.

If your items become more popular over time, you can increase prices slowly as well. It also protects against some supply chain concerns. When demand is at its highest, not only are customers typically willing to pay more, but a discount or deal could quickly lead to out-of-stock issues that can cause long-term harm to your business.

Here’s a simplified tool version of demand pricing, but it can help you figure out where on the price axis you might be.

Tip: Demand-based pricing should include a look at your margins. If you’re making a 50% margin on a product and you increase the price by 10%, you can see up to a 16% decline in sales volume while still increasing your revenue from it.

3. Price based on release date

The crux of this dynamic pricing strategy is that the newer something is, the more it’ll cost. It’s perfect for in-store and online retailers who have a consistent flow of new products, like apparel shops.

If your marketing persona for the product is the person that “just has to have the latest new thing”, then you know they’re willing to pay more if they can be one of the first people to get it.

The more excited your customers are about a product, the more you can play with its price. In some cases, a product can even appreciate in value after the original release.

One product category where this is especially true is with sneakers, which has a secondary market valued at $1 billion. Highly anticipated sneakers typically have pre-orders and waitlists, and sell out remarkably fast. As the shoe becomes scarcer and fewer remain, but demand remains high, they become increasingly expensive. For example, the original cost of a pair of Kanye West’s “Red October” Nikes was roughly $250 USD. 4 years later, a pair costs upwards of $5,000 USD—that’s a 1900% price increase!

4. Price based on time or season

Buying a winter jacket costs more in winter than at the end of spring. We all know about these items and typically think of it as a “sale,” but it’s actually a form of dynamic pricing.

However, you can also do this with goods throughout the day or week. Any restaurant or bar offering a “happy hour special”follow this pricing scheme to drive foot traffic when there are the most competition and the greatest demand.

Tip: This kind of dynamic pricing is often used to attract new customers by providing significant discounts for a limited time.

5. Let your data determine your pricing

The first four pricing strategies are designed to get you started with dynamic pricing. They help you determine price ranges for your products, as well as the desires and flexibility of your customers.

Use the data you’ve collected throughout the process to determine what’s working for you and what isn’t. Always refine your pricing based on how your customers’ respond.

Tip: Consider using your POS system’s analytics tools to get deeper insights into how your prices impact consumer demand. 

Pros and cons of dynamic pricing 

As with anything in business, dynamic pricing has its pros and cons. Let’s take a look. 

Dynamic pricing benefits 

• Increased profits – In many cases, you can actually raise prices. Dynamic pricing uses competitive and market data to not only determine which products can sell for a higher price, but what that higher price should be. 
• Pricing efficiency – The biggest benefit of dynamic pricing is that it’s an automated process. You let software handle this complex and tedious work so that you can focus on the areas of your business that need a human touch. 

Dynamic pricing issues  

• Angry customers – We’ve all been there. You see a product at a certain price, but leave and return a few days later to find the price has increased. For some shoppers, this isn’t a big deal. But for others, it’s a major issue that damages your brand reputation. 
• Pricing battles – If you’re in a competitive market, there’s a good chance you and your competitors are monitoring each other’s pricing. Regularly changing your pricing could result in a race to the bottom that hurts your profitability.  

Lightspeed can help you with dynamic pricing

Whether your store is online, brick-and-mortar, or both, one thing is certain. Customers will shop around to get the best prices. That’s why dynamic pricing is so valuable. Adjusting your prices based on their relation to other variables gives you flexibility, and helps you set the best price possible.