Dynamic pricing: How to avoid pitfalls in its introduction

With increasing price transparency on the Web, the competitive pressure upon online retailers is also increasing. This is a development that turns pricing into a minefield. Products have to be priced in such a way that on the one hand they are attractive to the customer and on the other side still offer sufficient margin. But caution is required here, especially in the “race for the best price”, because a merciless price-leader strategy is unpromising for many retailers over the longer term. How you can escape this pricing spiral downwards, we present to you in our article “Dynamic price setting: How to escape the pricing spiral”. Another problem arises with the new launch of a product. Because of increasing time pressure, there often occurs a rapid market entry, even before an optimal price setting has been worked out. Of course, a low price will initially help to penetrate the market. Many online retailers, however, later find that long-term profitability suffers from low prices. In addition, there are also ever-shorter product life cycles that require faster price adjustments.

These challenges clearly highlight the importance of intelligent dynamic pricing. This implies a strategy in which companies price their products based on the current market situation. The basic advantage here is obvious: an optimised margin!

But without the appropriate planning, this supposed miracle weapon can also backfire. In today’s article we show you how to avoid the pitfalls of introducing dynamic price management and how to increase your sales volume with a well thought-out pricing strategy.

Rely on a transparent pricing policy

The key to the success or failure of dynamic price management is its impact on the target audience. So far, the willingness of customers to accept dynamic price setting is very high, especially in the tourism sector. In the case of hotel or flight bookings, customers usually assume that prices will vary greatly, even before a search has been performed. The perception of online retail in products, however, is different. As the economists Justus Haucap and Werner Reinartz believe, a dynamic price management for retailers can quickly turn into a boomerang. Because customers perceive the ups and downs as unfair, they respond with a loss of confidence. In a recent interview with the Lebensmittel Zeitung (No. 39 dated 29.09.2017, pages 33 to 35), the two professors explain their concerns.

Reinartz: 85 percent of people who have bought a product find it unfair when the same item is available cheaper at the same retailer shortly afterwards. What particularly surprised us is that two-thirds of those for whom the product later became more expensive classified the differentiation as unfair. Those receiving an advantage today fear that they may be penalised at the next purchase.

Haucap: Customers have sensitive antennas in terms of fairness. If they feel wronged, they then turn their backs on the company. Retail therefore risks long-term customer loyalty and trust for a short-term increase in revenues.

Decisive, therefore, is how you present yourself, as a retailer, to your customers. A majority of consumers have not yet heard of dynamic pricing. Accordingly, the fairness perceived by the customer in eCommerce is increasingly coming to the fore. Companies have a duty to clarify their pricing policy, since, after all, this is also in the favour of customers. They have in low demand periods, for example, the chance of securing favourable offers. Find out how responsive your customers are and learn to assess whether they understand the system. Your prices must be reasonable from the customer’s point of view and price differences must be comprehensible. When evaluating your pricing strategy, feedback systems that analyse the impact on conversion rate, turnover, customer loyalty and return rates will be of help. A best-practice example is also provided by the Otto Group, which openly discusses its dynamic pricing methods and thus increases the public perception of various pricing mechanisms.

Evaluate competitor prices in the context of your brand strength

Apart from customer willingness to buy, it is above all market monitoring by retailers that is the key to ensuring long-term competitiveness. With an intelligent dynamic pricing strategy, you are more likely to attract potential customers by price and simultaneously can optimise your margin.
If you operate your own online shop, it is important to always rate your competitors’ prices in the context of your own brand strength. A retailer with excellent customer service, free shipping and returns, lengthy returns eligibility or sustainable products may potentially profit more than a price leader would. Justified by the retailer service levels, the price acceptance of customers will be higher here.
If you sell on Amazon, eBay or other online marketplaces and you want to use them effectively to increase sales, then you should know the market prices of the products you sell through a marketplace.
In any case, your pricing strategy must be substantiated and fixed on the basis of numbers. Possible specifications could be that upon sale at least a seven percent margin must be achieved, your own price ideally stands 50 cents below the largest competitors but perhaps still above the market average, or your own products must be priced among the Top 10 listed on Amazon.

Dynamic pricing: Evaluate competitor prices in the context of your brand strength

The recording and analysis of the market situation is indispensible to correct pricing. In this way, you can sustainably strengthen your pricing image and set market-driven prices for your goods.

Acquire the resources for a comprehensive data analysis

While small retailers may still be able to manually research their competitive environment, medium-sized and large companies are increasingly using big data and systematic analysis. After all, an up-to-date and constant evaluation of all price influencing factors quickly becomes an insurmountable challenge without an automated software solution, amidst an assortment of several thousand products and constantly changing market conditions.
Our blackbee Business Intelligence Suite helps you to keep an eye on your competitors and market developments and derives from this concrete recommendations for action by your pricing managers. You receive up-to-date information on which products are offered too expensively or too cheaply compared to your competitors. If a particular product is well below the market average, for example, blackbee will show you specific potentials for price increases. If required, the prices can also be implemented fully automatically. For these reasons, blackbee is far superior to manual procedures on time and cost grounds.

Dynamic pricing: Acquire the resources for a comprehensive data analysis

blackbee provides you with up-to-date data on the price development of your competitors. On the start page – the so-called dashboard – you can see at a glance how you stand compared to the competitor price index and receive specific information about which of your articles offer potential for optimisation.

Would you like to optimise your margins and are you planning to introduce a dynamic pricing strategy? We will be happy to help you with the implementation! Test blackbee now and convince yourself of the easy operability of our technology!