Dynamic pricing: how it works and how much it’s used in 2016
The price is the most important feature when buying online
The online sale and the in-store one are completely different compared one another. One of the main feature that distinguish those two is the facility that allows people to check and compare the same item on different websites. People are able to spend hours searching for the best deal on the Internet.
We are used to spend hours comparing different offers when it comes to purchase online, like a car or some furniture for the house. But it’s unlikely the comparison of one kilo of apples between two different supermarkets, or a pair of sneakers in the mall. The reason is pretty easy: the physical move, the time we invest in the research, the risk that occur in finding worst deal have such an importance to us that overcome the geographic distance.
When it come to buy online, it doesn’t work this way, comparisons are easy to make, shippings are reaching your home and the first thing people are going to consider is the price. This is the reason why most of people (80%) are actually using the Web as infocommerce, or so to say get useful information in order to make good deals and they compare until 4 e-commerce before choosing where to purchase. If we look at the fashion world or the luxury one, where the value associated to the brand is extremely important as well as the return policy, the price is always among the first 3 parameters considered by the customers.
Competitoor’s team knows very well the online prices system
We daily track 9.000.000 prices for our e-commerce and brands. We get those prices on thousands of online shops and thanks to these information we can call ourself experts of the dynamic pricing strategy.
How the dynamic pricing works
The dynamic pricing system is widely used from those entrepreneurs that are selling online. It is useful to change in real time the price of an item and be reactive to the demand from the market.
Thanks to a specific algorithm, we can get different information such as the number of views on a specific product and when it was viewed. After that, it’s able to automatically change the price on the website, making it higher or lower in order to increase the income.
Amazon is one of the pillars that introduced the dynamic pricing and in the US market it has brought down, through legal battles, some boundaries deleting some behaviour that were considered standard. By introducing the concept of dynamic pricing, two people are able to see the same item but with a different price. This kind scenario is unthinkable in the ordinary shop where are still present rules about deals and the maximum discount the shop can do.
The way from this kind of law to the algorithm that allows to get prices is a huge step forward that saw Amazon and all the others e-commerce slipping in the “grey zone” where everything is allowed. Even though they can be seen as rook.
Recent researches had shown that the market reacted positively to this kind of strategy. Moreover those e-commerce or brands that adopted the dynamic pricing has increased the revenue up to 20% compared to those that were stuck in the manual process of managing prices, gaining only up to 6%-8%
The dynamic pricing touches also the interests of the customers, because if you know how to move yourself in the Internet world you can really make good deals.
Hereafter just three examples:
So while in the in store you can find them in the shelf, in the online market they stay longer and with extremely lower price.
But just step back to those parameters that allows the algorithm determining how modifying the price on a specific product. The most common one is checking the competitions’ prices. Competitoor allows you to do that by offering different plans depending if you are a big or small e-commerce, or a retailer that wants to beat the competition on eBay and Amazon.
How much the dynamic price is used
Here in Competitoor we are able to know when an e-commerce is using the dynamic pricing system. Those that use it the most are usually the marketplaces such as Amazon and eBay, but also some big e-commerce that are selling items very different one another. In this way they are able to competing with those mono brand or just specialized on a particular market field.
It’s important to add that there is no specific market where the dynamic pricing is working better than another. Electronic items for instance, rather than cars’ accessories or bikes, rather than home furnitures, are fields where this strategy is going great.
It does not highlight a particular propensity to use the dynamic price according to the "size" of the price: the algorithm often works on cents in order to stay within a certain "thresholds" (the minimum price allowed), and trying in all ways to be more and more competitive than competitors (or at least some of these). Even the price of a kg of pears thus can have a dynamic variation and so contribute to the success of the store.
On the other hand, the price can vary according to the country the entrepreneur is selling. In the US, the dynamic pricing is more used than in Europe. Some statistical studies have shown that over 50% of those who sell online in America uses a hybrid approach, manually correcting some precalculated values with dynamic pricing.
What about Italy? Compared to the rest of Europe Italy owns 3% of e-commerce (London alone hosts 30% of European online stores). It is a market that in recent years has grown rapidly and it will catch up soon with the rest of the countries.
Thanks to the data obtained with Competitoor we can say that more than 5% of the e-commerce in Italy are actually using the dynamic pricing strategy. Not all the shops are using it, but those few that are able to put in practice this technique are really doing it right.
The 1% of the analyzed domains, changes for each product on display the price every two days. Since people tend to check the prices weekly, this strategy allows to maximize the income in extreme security. Of course we have to attend an evolution because since 2010 the e-commerce market is growing very fast and new generations are more familiar with this technology and able to use it to get proper advantages.
When using the dynamic pricing strategy
Being able to decide when and how much changing the price, is very important for the success of your sales. This kind of decision requires a wide knowledge of your market. For this reason, with Competitoor our customers have the chance to daily track and check the competitions’ prices and so to say get to know which next step is important to do.
According to lots of entrepreneurs of brands and e-commerce, a frequent variation of the price is a good strategy to attract people, because in this way they more likely get back to the website to check if the price is different. The dynamic price is for sure a good strategy for this kind of results.
At the same time some customers are not happy with this constant variation because it is reason of frustration, dissatisfaction and confusion. It can be seen as an obstacle to the purchase process. In these terms the customers don’t know when it’s the best time to purchase because they don’t have a clear idea of the price. It has been demonstrated that when the purchase decision is getting complex, is more likely that the customer tends to think about it more with the risk of forgetting about it at all.
Another risk linked to the dynamic pricing strategy is that it brings the customer’s attention from the item’s features to the price level. In this way people tend to forget the real “why” they are purchasing it instead of another similar one.
The best way you can start using the dynamic pricing strategy is first of all having a clear idea of how your market works. Competitoor offers you 3 types of different plans: Starter, Pro, Enterprise.
The Starter plan is only manual and is perfect if you have to check up to 100 items.
The Pro plan is perfect for those that want to keep tracked every single change in terms of price of the competition. For instance in the fashion industry, where the comparison is not perfect, brands tend to check not a single item but the entire catalogue of the competitor in order to optimize the offers and the sales strategies.
The Enterprise plan is perfect for those e-commerce that want to check their competitors but also for those brands that wants to check the retailers.
This plan is automatic and gives all the needed information if an entrepreneur wants to apply the dynamic pricing to the products, not considering the technology used and the market’s field.