Dynamic pricing is based on the idea of retailers or manufacturers optimising their own margins by differentiating prices. This is nothing new for the consumer, who has for years been aware of fluctuating petrol prices or special sales offers. In eCommerce, however, pricing takes into account factors that cannot be harnessed from stationary retail. Thanks to computer-supported analyses, it is possible to take the purchasing behaviour of users and current market conditions into account when setting prices. Online retailers and manufacturers can adjust their prices using the following features, for example:
- Customer profiles (age or previous purchases)
- End devices (mobile phone, laptop or tablet)
- Time of purchase (high or low demand periods, seasonal events)
- Market environment (current prices at competitors)
The potentials of dynamic price management are manifold. In addition to optimising revenues, maintaining competitiveness is particularly important. This is because retailers must react swiftly to offers from their competitors to prevent their own customers from drifting away. Price differentiations can also help to regulate stock levels or address potential buyers in a targeted fashion.
But the supposed miracle weapon of dynamic pricing also harbours risks. One of the biggest is the perceived fairness from the customer’s point of view. Studies show that reputation damage can quickly occur if consumers feel unfairly treated. Accordingly, the key to the success or failure of dynamic price management is its impact upon the target group. You should never jeopardise the trust of your customers for a short-term increase in revenues.
The risky game of pricing
For consumers, price plays an important role in their purchasing decision. As an idealo study shows, 97 percent of people occasionally compare prices on the Internet. Of course, price differentiations can also shift in the consumer’s favour here. This is because they have, for example, the opportunity to discover low-cost offers in periods of low demand. But what happens if the customer buys a product and then finds out a few days later that it has now become much cheaper?
The German Trade Association (HDE), in cooperation with the Institute for Retail Research (IFH) from Cologne, has conducted a study on this subject and found that consumers are rather sceptical about price differentiations. After price changes had been implemented on purchases already made, the market researchers examined the perception of those price differences among the customers involved. Only 15.5 percent of the respondents who experienced a disadvantage due to price differentiation rated the price difference as fair. However, only 34.8 percent of those who were offered an advantage found that differentiation to be justified.
The authors of the study assume that consumers will react negatively over the longer term to price differentiations they have experienced in retail. Even if they benefit from a short-term advantage, many still fear that they could be disadvantaged in the longer run. The survey also shows that the perception of a retailer’s reliability decreases by 28.5 percentage points after an experienced price differentiation. Credibility also drops by 28 points and trust in the retailer reduces by 24.1 percent.
Transparency generates trust
A large proportion of consumers have not yet heard of dynamic pricing and are sceptical about the frequent dips and rises in prices. Meanwhile, consumer protection agencies also deplore the lacking transparency of price-setting in online retail.
“Customers cannot judge whether they are saving or paying extra for their purchases. Besides, they also have no more reliable reference prices, from which they can measure the value of a product”, explains Market Watch team-leader Kirsti Dautzenberg.
As an online retailer or manufacturer, you should therefore carefully check the usage of differentiated prices (especially at the individual level). Find out how accommodating your customers are and learn to assess whether they understand the system. Your prices must be reasonable from the customer’s viewpoint and any price differences must be comprehensible. When evaluating your pricing strategy, feedback systems that analyse the effects on your conversion rate, revenue, customer loyalty and returned goods rate will also support you. Another example of best practice is provided by the Otto Group, which openly discusses its dynamic pricing methods, thereby increasing public awareness of their various pricing mechanisms.
Also bear in mind that it is not only prices that will win you customers. Focus on reliability, retaining customers with good service, flexible returns and fast shipping, also transforming site visitors into buyers by appropriate measures. You can find out more about these possibilities in our article “Online shop of the future – how to convince the customers of tomorrow“.
Best practice: Price adaptation to your competition
As an online retailer or manufacturer, you can no longer do away with price adjustments. But instead of daily multiple and automated price changes, you should rely on an active and market-conformist price management with a clear strategy behind it. Thanks to intelligent software solutions such as blackbee, you can receive daily updated data on your current market position. The technology shows you for which of your articles there is optimisation potential in terms of pricing and also offers you suitable suggestions. You can actively accept or reject all of these price suggestions yourself. You will thus always maintain a full control over your own prices. Thanks to blackbee, you receive a comprehensive market overview with little effort and can make full use of your margins. And most importantly of all – controlled adjustments to the competition are also highly welcomed by consumers!
How to implement such a pricing strategy with blackbee in practice is described in our article series “The ultimate online pricing guide – In 5 steps to active price management“.
Do you need assistance in price optimisation? Test blackbee now and convince yourself of our technology!