Why Dynamic Pricing is the New Standard in E-Commerce

Dynamic pricing is a topic that's been getting a lot of attention lately. It's come a long way since it publicly debuted in the airline industry in the 1980s. Now we're used to seeing it across many different industries. From Uber to Amazon.com, many businesses are putting their own spin on dynamic pricing. But what is it exactly? To put it simply, it's a flexible pricing strategy in which businesses alter their pricing based on a number of factors, both internal and external.

Among the many internal factors that dynamic pricing takes into account, one that's key to e-commerce success is effective inventory management. No one is perfect, so retailers always run the risk of running out of a product that randomly becomes a hit. However, when retailers notice that certain items are selling at lightning speed, they can temporarily increase the price to make sure that they don't completely deplete their stock (and of course maximize their margin while they're at it).

Consumers are less likely to buy a product that's much more expensive than it usually is. This is an especially important strategy for retailers that sell on Amazon because in-stock consistency is necessary in order to win the coveted Buy Box. There are many more internal factors (e.g., sales goals) that can be addressed by shifting prices up or down.

One of the top external factors that retailers keep in mind when they reprice is competitor pricing. Consumers have so many options and the competition is just a click away. Many big-box retailers practice price matching because they have the resources to sustain the potential losses, but many retailers aren't as fortunate. Regardless of a company's size, setting price floors is essential to avoid selling at a loss.

What holds true across all businesses that use dynamic pricing is that competitive analysis is central. Constantly monitoring competitor pricing is the only way to really be aware of the changes in the competitive landscape. Pricing in line with the current market is the way to ensure competitiveness. Amazon is well known for its price-cutting tactics, which have gained it top-of-mind status with online shoppers. However, dynamic pricing is a lot more complex than just dropping prices.

Just as anyone who has ever used Uber can tell you, dynamic pricing is also about increasing prices. Uber's surge pricing model is centered around supply, demand, weather and more. A rainy day or late-night ride will cost you more than usual, just as a product might when it's the new must-have item. There are numerous reasons to increase prices, such as when consumer traffic is high or when a competitor runs out of stock. Bumping up prices makes it possible to maximize profit on each sale.

The aim of dynamic pricing is to keep up with the market while optimizing sales and profits. Dynamic pricing has become the new standard in retail pricing strategy because of the fast-paced nature of the industry. Even a momentary lapse in pricing acumen can lead to a substantial loss for a retailer's bottom line. Therefore, many retailers, from Wal-Mart to Best Buy, have adopted a dynamic pricing strategy to keep up and even get ahead with automatic repricing tools.

Angelica Valentine is the content marketing manager at Wiser, a dynamic pricing engine for retailers.