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Using Dynamic Pricing to Drive Better Profit Margins

by | Nov 9, 2023 | Ultimate Special Offers

Setting prices for your Shopify store involves more than deciding profit margins, researching competitor prices, and launching marketing campaigns. Negotiating prices with your customers would be an inefficient strategy. Instead, you might want to consider incorporating dynamic pricing models

This will allow you to maximize profits and stay on top of the market demand. It can also give you insights into what customers are actually willing to pay, help you optimize your inventory, and improve your ability to pivot or adjust in real time

There are some legal boundaries to be aware of with dynamic pricing, which we’ll explain below. Plus, customers may be apprehensive if you’re not careful with how you run your strategy. When it’s executed well, though, retailers and customers are both getting their needs met successfully. 

In this blog, we’ll show you how dynamic pricing strategies provide the right prices at the right time. We’ll also help you determine whether you’d benefit from incorporating this pricing method into your Shopify store.

Understanding Dynamic Pricing

Dynamic pricing is more than a clever way to increase profit margins and leverage customer demands. It goes beyond custom pricing often used by wholesalers to negotiate profit margins. When you understand how dynamic pricing works, you can use it to curate better customer experiences, even as the price points go up.

How Does Dynamic Pricing Work?  

With dynamic pricing software, the process begins by collecting real-time data on market conditions, customer demands, competitor pricing, stock availability, and other factors. The data is then analyzed to set a base for the system to start with. Using the patterns identified in the data, algorithms help the dynamic pricing app make informed predictions about when to change prices.

As the automation works, additional data is continuously collected. As the analysis reveals new patterns and habits, price changes are implemented at the right time to maximize profits and meet demands.

The algorithms also monitor how consumers respond to price changes over time. If higher prices are well-received, the pricing management system will continue to push the limits and adapt to find the ideal price points for your market. It puts competitive pricing on autopilot for you.

On the backend, it can be complex to create product pages that display dynamic prices correctly. Some pricing decisions are easier to implement than others, but getting it done right is important for your store’s reputation and average rating with customers. If you decide to use this pricing model, ensure you have access to a solid tech support team ,or use a dynamic pricing app that will work well with your online store.

Who Uses Dynamic Pricing Models?

Many industries use dynamic pricing methods to maximize profits. For example, airlines and hotels use these pricing models to change prices based on how many seats or rooms are left on a particular day. They also adjust for higher demands during holiday seasons or lower demands for bookings at an inconvenient time of day.

The travel and hospitality industry has been very transparent about its dynamic pricing strategy. This has conditioned consumers to expect variable pricing. Contrary to what you might think, doing so has created a better customer experience by giving them the power of choice. Experienced travelers know they will find lower prices on airline tickets if they book in advance or are willing to travel at off-peak times. They also know that the lowest prices on hotel rooms will be the most basic accommodations and they’ll pay more for a better room.

Consumers are aware of variable pricing for ride-sharing services and event tickets, too. They expect higher ticket prices for better seats and surge pricing to get an Uber after the event when many people are requesting rides simultaneously. Either way, they are choosing to pay for an elevated experience or planning ahead to get lower prices. Putting this kind of control into their hands creates a favorable customer experience.

How Can Online Retailers Put It to Work and Benefit? 

Online retail giant Amazon has been using dynamic pricing strategies to increase profits and adjust to available inventory supplies for many years. According to a Bain & Company study, 85% of retailers are aware that they need to set prices differently and nearly all of them lack a useful dashboard to monitor whether their pricing strategy is working or not.

Smaller retailers who are learning to use dynamic pricing tools can have price adjustments applied with the simple intention of beating competitors’ pricing or average market prices. Here are some other ways to consider using dynamic pricing in your ecommerce:

  • Cross-reference the amount of traffic with recent conversion rates and set pricing rules that will help ensure you reach your goals
  • Have product prices that fluctuate based on inventory and supply chain to ensure you won’t go out of stock while still making it available for those willing to pay higher prices
  • Provide time-based pricing or demand-based pricing that offers incentives for shopping earlier or moving inventory that isn’t selling well
  • Use value-based pricing that determines how much customers are willing to pay based on perceived value within their demographics or location

As you can see, there are many ways to use dynamic pricing to get the most out of your ecommerce sales and pivot to optimize your inventory.

Dynamic Pricing vs. Other Pricing Models

Person holding a red and green apple

While dynamic pricing could be a huge benefit to your Shopify store, be sure to consider other pricing models for comparison before deciding which options are best for you. It may not be ideal for every ecommerce business, but the perks of automated price monitoring and price optimization become clear when you compare it against more traditional pricing methods.

Fixed (aka Static) Pricing

In a more traditional pricing method, fixed pricing means setting a single price for a product or service. These prices would only change when the vendor prices or other major factors impact your ability to maintain the price point. Demand or supply fluctuations would not be a factor in price changes.

While these pricing decisions provide simplicity and predictability, they may not always be the most profitable option. For instance, if demand for a product suddenly increases, a retailer using fixed pricing would miss out on potential profits by not adjusting their prices accordingly. They may also run out of stock sooner than expected due to prices that didn’t pivot with the market demand.

Cost-Plus Pricing

Cost-plus pricing, similar to fixed pricing, is another traditional way to set prices. It involves marking the price up a predetermined percentage above the retailer’s cost. Similar to fixed pricing, this will provide predictability for revenue whenever the products are purchased. However, it still doesn’t allow for fluctuations in market conditions, and it doesn’t provide anything unique for the customer experience.

Location-Based Pricing

With some pricing methods, you’ll use some of the metrics used in the dynamic pricing model, but it would be based on data that doesn’t change. In this case, we’re talking about location. 

As an example, let’s say you have five distribution warehouses and a small fleet of delivery drivers at each. Your overhead costs are lower for customers in proximity to these locations, so you may be able to provide lower prices. On a broader scale, you may be able to offer different prices to customers in various countries or regions around the globe.

The main thing to note here is that these prices are still static price points that will only change when something takes a toll on your profit margins. One of the downfalls of location-based pricing may be that it feels unfair to the customers, and that can damage their perception of your brand. Another concern is that this pricing model doesn’t address competition or market demands at all.

Value-Based Pricing

As mentioned above, value-based pricing can be woven into your dynamic pricing strategy. However, it can also be used as a dedicated pricing model for online retailers. In this structure, your pricing is determined by considering the customers’ perceived value. It shifts away from the competitors and market and focuses on finding the best price that customers are willing to pay.

There are many ways to add perceived value to your brand. One tactic that has huge marketability is donating a portion of the proceeds to a charitable cause that resonates with your customers. Brands like Grasshopper Mermaid ensure that their customers know every purchase supports global conservation efforts.

Can You Use Dynamic Pricing on Shopify?

Dynamic pricing: Shopify mobile app

It’s important to keep in mind that there are laws enacted to ensure businesses protect customer data, limit how data is used, and prevent unethical pricing practices. For example, in 1936, the Robinson-Patman Act was signed into law in the United States to prevent monopolies and protect small businesses from big corporations.

Dynamic pricing is permitted under this law, but it prohibits any special pricing that would discriminate against protected classes such as race, age, gender, religion, and so on. Because of laws like this, it’s important to be careful about which data you allow to affect your pricing decisions because the Shopify app collects a wide range of information about customers.

As your system begins behavior analysis and price monitoring in your online store, it will be able to uncover shopping patterns and habits that provide insights to establish baselines for the algorithms. It will combine that information with your desired outcomes and get to work creating the right prices for the right customers.

Your goals may revolve around increasing brand visibility and traffic, moving the most merchandise through your Shopify store, or simply bringing in more revenue. Whichever it is right now, dynamic pricing algorithms will monitor the moving parts for you and adjust pricing as needed to meet the goals. As your business grows on Shopify or the market demand changes, you’ll be able to pivot and maintain that profitable sweet spot.

Once your customers start responding positively to your new pricing methods, you’ll want to continue building the relationship with them. You may want to implement incentives or special offers as they show signs of trust and loyalty.

Put It Into Action

With a good understanding of why dynamic pricing strategies are gaining in rapid popularity, you may be considering it for your business, too. It makes sense for many online retailers to use the available technology to optimize pricing, increase profit margins, and manage inventory. 

Plus, dynamic pricing has been shown to increase customer engagement and improve relations. When it’s done correctly, everyone wins and we love that.

Even if dynamic pricing isn’t right for your business, you can use special offers as a strategy to boost sales and keep your business moving in any market conditions. With Orbit’s Ultimate Special Offers Shopify app, you can use one of nine different promotional offer types to increase your average order value, move merchandise, and attract customers. Install the Ultimate Special Offers app today!

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