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Can Dynamic Pricing Work for the eCommerce Segment?

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Dynamic pricing, a strategy which enables businesses to provide flexible prices for products and services is now catching on across hospitality, retail, travel and entertainment industry segments. Whether the aim is to stay profitable, fill up an airplane or sell as many sports tickets or products online as possible, companies today are using dynamic pricing to achieve their business goals.

While this model has been in existence for several decades, it is only now that is gaining momentum, and is likely to grow more pervasive in the years to come.

How effective is dynamic pricing?

In 1978, the airline industry in the U.S. was deregulated and this gave companies the freedom to follow different pricing models. Some companies adopted a dynamic pricing model, and were quite successful. Other companies held on to the standard pricing model and tried to find loopholes in their competitors’ marketing strategies. Many of them went bankrupt!

Does this essentially mean that the company which offers the lowest price for a product will win over their competition? Fast forward to the 2000s when Buy.com used a dynamic pricing strategy which relied on a software agent to search its competitor’s websites for competing prices, and in response, reduced its own prices. This approach helped Buy.com gain significant customer traction, but its profit margins suffered.

To summarize, it is crucial to arrive at a balance between having competitive prices and maintaining healthy margins. Some pertinent questions to be asked when considering this model are:

  1. What should be the cost of the product?
  2. What should be the duration for an offer? And,
  3. How to arrive at that point?

 

The answers to the questions above depend entirely upon the individual businesses and their respective products. This is because inventory, demand and competition are individual attributes which differ from product to product and company to company.

Nevertheless, in general terms, the factors which might drive a company to opt for dynamic pricing are:

  1. Sectors with relatively high start-up costs compared to operating costs
  2. Sectors with finite markets, i.e. markets with finite time horizons, finite seller inventories and finite buyer population

 

This model has actually helped industries with high perishables like the airline industry, sports ticketing companies etc. to improve profit margins.

If it works for others it should work for eCommerce too, right?

The eCommerce industry is not a finite market and it does not have a finite time horizon, finite seller inventory and finite buyer population. Also, start-up and operational costs are considerably lower for eCommerce companies because of technological advancements. So, the question is, does the eCommerce industry really need dynamic pricing?

The answer is `yes’ and, in this case, the business’ goals might not be tied entirely to improving profit margins, but also to build a unique brand identity and gain a competitive edge.

The good news is that customers have reacted well to dynamic pricing models over the years, as seen in the deregulated airline industry where the technology is perceived as offering lower prices in many situations.

In summary, by implementing inventory-based, data-driven, game theory or, simulation models, eCommerce companies can capture the volatile internet market and get to a consumer-centric, product-specific dynamic pricing strategy.

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