Why Every Store Should Price Like Uber

What is dynamic pricing?

Let's start with the basics – what is dynamic pricing after all? Dynamic pricing is a strategy of changing prices based on any number of factors, including demand, supply, cost, time, competitors, and many others. 

You may immediately think of the time an Uber home from work during a downpour was triple the price it normally would have been. But countless industries do this. Check a United flight today and there’s no guarantee it’ll be the same as tomorrow. Go and fill up your tank of gas and it could cost $50 today and $60 tomorrow (or today at the gas station without a competitor across the street). Even check competitive products on Amazon and you’ll be unlikely to see price stability. 

If you want your business to succeed, you should probably start implementing a dynamic pricing strategy of your own.

The importance of dynamic pricing

By changing prices to match customer demand, dynamic pricing is by far the best strategy to grow profits. Dynamic pricing enables businesses to capitalize on high demand by selling more products/services at a higher price and also helps them adapt to low demand by selling less for a lower price. The flexible nature of dynamic pricing allows businesses to optimize revenue and sales based on market conditions. 

Whether or not your e-commerce business currently prices dynamically, it’s here to stay. So it’s time to hop on the bandwagon or get left behind

Factors to consider

The truth is, everyone in the world of e-commerce is making the shift to dynamic pricing. Why? Because it allows you to compete effectively while responding to demand fluctuations, helps you maximize revenue and cater to customer preferences, and improves your overall market share. Here are a few important things to consider once you make the decision to start dynamically pricing.

1. Think about your costs

a. If you run an e-commerce business (or any business for that matter), you're certainly already considering your costs. If you're not, you may want to reconsider your career choice...

b. When considering costs, you should be looking at COGS, overhead costs, margins, the competitive landscape, and how sustainable your new price will likely be.

c. While customer demand and market conditions remain key considerations in dynamic pricing, it is important to remember your costs/ business expenses to ensure your new pricing strategy is actually profitable.

2. What kind of inventory do you have?

a. You might be doing this already - if you aren't, you should definitely start. How awesome would it be if products that were going to sell out before you got more inventory just became more expensive?

b. First off, you should think about whether your supply is fixed or infinite. Products with fixed supply are limited due to resources and capacity, making them rarer and thus more expensive or exclusive. Products with infinite supply, on the other hand, can easily be increased accordingly with demand. 

c. Knowing the distinction between these two things has important implications for how you should price and predict consumer behavior. Bottom line: know your product.

3. Keep up with your competitors 

a. Some companies are better at this than others (and for some, it's more relevant), but how closely are you tracking your competitors' prices?

b. The answer is probably not enough, and they likely change them more than you think.

c. Analyzing your competitors' prices lets you understand how you should be adjusting your own, and helps you strategize on how to make a better competing offer (like improving it with value-added services or strategically placing your products)

4. What are your customers willing to pay (elasticity of demand)?

a. This is the most underrated factor!

b. Something that businesses often fail to consider is how sensitive their customers are to price changes

c. The real question e-commerce companies should be asking to figure out their optimal price strategy is what is their elasticity of demand. In other words, what are their customers willing to pay?

d. Right now only the most sophisticated businesses are measuring this, and the only way to accurately do so is through testing. 

Bottom line

Dynamic pricing is essential to keep up with and compete in the 21st-century market. However, using data-driven results to inform your pricing strategies is equally as important. At Intelligems, we have run thousands of price tests to help people get real-time data on what their customers are willing to pay for.