Revel Blog

How to Effectively Implement Retail Dynamic Pricing

Coral Drake | May 9, 2024 |

retail Featured
How to Effectively Implement Retail Dynamic Pricing

Pricing products to maximize profits in retail has never been easy. Too low and you lose out on profit. Too high and you deter consumers, hurting brand image and sales. 

Dynamic pricing, also known as surge pricing, flexible pricing, or variable pricing, is a clever way to get the prices just right. It adjusts product prices instantly in response to changes in consumer demand, market conditions, and other factors.

A dynamic pricing strategy can be a valuable tool for increasing profits, but it can also hurt consumer trust if not implemented properly. Here’s how retail dynamic pricing may benefit your business and how to use it to boost profits and keep customers happy. 

How Retail Dynamic Pricing Operates in the Retail Environment

Dynamic pricing in retail relies on big data, employing algorithms and artificial intelligence (AI) to automate pricing adjustments. Prices can be changed depending on all kinds of influences, from the time of day or season to customer traffic and competitor prices. Inventory levels, purchase behavior, weather, and local events are all taken into account by dynamic pricing software.

What’s the effect of all of this price changing? Some estimates have found that implementing dynamic pricing can result in sales increases of up to 30%.

Types of Dynamic Pricing in Retail

1. Time-Based Pricing

Time-based dynamic pricing adjusts prices in limited-time durations, like sales. It creates urgency by encouraging customers to make purchases within a specific timeframe. Customers know that prices will return to normal once the promotional period ends, which is a powerful driver for purchases. 

2. Segmented Pricing

Segmented or differential pricing sets different prices for different customer segments based on factors like demographics, social status, or geographic location. Common applications include offering student or senior discounts. 

3. Peak Pricing

Also known as surge pricing, peak pricing takes advantage of high-demand periods by raising prices. It’s particularly effective when supply is limited and demand is high, such as during peak travel seasons for airlines or rush hours for ride share services like Uber. It helps manage demand and maximize revenue during critical times.

4. Price Skimming

Price skimming sets high prices for a new product or service to maximize revenue from early adopters who are less price-sensitive. Over time, prices are gradually lowered to attract more price-sensitive customers. This method is often used in the technology sector, where new gadgets are priced high at launch.

5. Bundle Pricing

Bundle pricing offers products or services together at a lower price than they would cost individually to encourage customers to purchase more items by highlighting the savings of buying the bundle.

6. Penetration Pricing

This strategy sets a low price to enter a competitive market and attract customers quickly, but after building a market presence and customer base, prices are gradually increased. This approach is common among startups and new market entrants looking to build brand awareness quickly.

7. Cost-Plus Pricing

Cost-plus pricing is a straightforward method where a fixed percentage of profit is added to the product’s cost to determine its price. This model is widely used for products or services with variable costs, like natural products.

8. Competitive Pricing

Competitor-based dynamic pricing adjusts prices based on competitors' pricing strategies. Retailers try to stay just below competitor prices without significantly undercutting their margins. This strategy is crucial in highly competitive markets for common goods. 

9. Value-Based Pricing

Value-based pricing sets prices primarily on the perceived value to the customer rather than on the cost of the product or market prices. It’s effective for products with high customer-perceived benefits like art or limited-edition purchases.

Pros and Cons of Dynamic Pricing in Retail

Pros of Variable Pricing

  • Maximize revenue by adjusting prices based on demand.
  • Adjust prices on the fly to respond to market supply and demand so products are priced optimally to meet market conditions.
  • Stay ahead of competitors who use fixed pricing models.
  • Gain a deep understanding of market dynamics and tailor pricing strategies to effectively increase sales.
  • Learn what triggers purchases, the best times for sales, and the price ranges customers are willing to pay.

Cons of Variable Pricing

  • Changing prices can lead to customers thinking pricing is unfair or inconsistent. It could also confuse customers, driving them to competitors offering more stable pricing.
  • Dynamic pricing requires sophisticated technology and expertise in data analysis. Smaller businesses may find the costs prohibitive.
  • In certain industries, such as utilities or healthcare, flexible pricing can raise ethical concerns and potentially lead to legal issues if it seems to be taking advantage of consumers during critical times.
  • Aggressive pricing strategies may trigger price wars with competitors, which can lead to a race to the bottom, where no one wins in the long term.
  • Some sectors have strict regulations that may limit the ability to implement dynamic pricing.

How to Implement Retail Dynamic Pricing Effectively

A dynamic pricing model is a powerful tool, but its success depends on how well it is implemented and managed. Here’s how retailers can use variable pricing as effectively as possible:

1. Focus on the Out-the-Door Price

The total out-the-door price includes taxes, shipping, and any additional fees. Consumers evaluate these cumulative costs when making purchasing decisions, so retailers must integrate them into their dynamic pricing strategy. 

For example, a retailer might offer lower delivery fees with longer delivery times based on the insight that customers prefer receiving products, like furniture, on more convenient days like weekends, even if it means waiting longer. 

2. Consider Consumer Expectations

Different products demand different dynamic pricing strategies based on how frequently consumers expect their prices to change. For instance, fast fashion items like a trendy new bag might see more frequent adjustments than basic items like plain T-shirts or socks, which customers expect to have stable prices. 

Maintain stability in pricing for high-value items that consumers tend to research extensively, as any sudden or frequent price changes can frustrate these well-informed customers and potentially drive them away–especially if the price keeps going up. 

3. Test and Refine Your Strategy

Dynamic pricing demands a continual test-and-learn approach. Set up a systematic way to track progress in your dynamic pricing strategy and make quick adjustments based on market response. 

Test different price points, limited time offers, and bundled offers–using these insights to refine your pricing strategy. Dynamic pricing software can be invaluable in conducting this kind of test. 

Build a Retail Dynamic Pricing Strategy That Works For Your Brand

For retail brands aiming to implement dynamic pricing strategies, integrating real-time inventory management is crucial. Revel's advanced POS inventory management provides tools to maintain precise control over stock levels so they can adapt pricing strategies responsively. 

With Revel, you are always informed about what items need reordering and when, thanks to automatic inventory updates and stock alerts. Revel’s low-stock alerts not only notify you when stock levels are low but also automate the purchase order process, sending them directly to vendors. You’ll also know when inventory is overstocked and a price reduction would be helpful in clearing out the extra supply. 

Revel’s system can manage complex inventories—categorizing items by attributes such as size and color to make it easy to make pricing adjustments to products with related characteristics. 

If you’re considering a dynamic pricing model for your retail store, be sure your inventory is under control first with Revel.