Dynamic pricing models customize prices based on consumer demand and preferences, making them a customer-centric approach. Here are the main steps that eCommerce businesses can adopt to implement a dynamic pricing strategy:
- Define clear business objectives and set reasonable pricing constraints
- Identify pricing triggers that motivate and impact consumers
- Personalize prices by segmenting products and customers
- Choose the most effective AI optimization model for your business
What is dynamic pricing in eCommerce?
Dynamic pricing using AI is an eCommerce strategy that adjusts product prices using data analysis to determine the optimal price at a given moment. It’s a shift away from static pricing whereby products have fixed prices. Instead, data and artificial intelligence is used to choose the best price point.
(Source)
Some key factors that influence these automated price adjustments include monitoring competitor pricing, supply and demand as well as wider market conditions. Other considerations are stock availability, production costs and profit margin, all of which are analyzed quickly and effectively using AI.
It’s especially beneficial for businesses with large product inventories, such as those with thousands of SKUs, as it allows for agility and responsiveness that would be nearly impossible to achieve manually. This has resulted in a proven way for retailers to increase online revenue and profit, which is why AI dynamic pricing is on the rise.
How does AI price optimization work?
The following steps demonstrate how AI-powered dynamic pricing works to optimize product prices, from data analysis and monitoring through to demand and most importantly, setting the right price.
(Source)
Real-time data analysis
The foundation of dynamic pricing is data analysis. By examining historical sales data, businesses can identify trends, patterns, and insights into customer behavior. This information helps eCommerce businesses make data-driven decisions on pricing that can be optimized to boost sales and revenue.
The key component here is AI, which can analyze extremely large datasets from multiple sources in a matter of minutes. AI has not only changed the way businesses can decipher data but it’s also improved the quality and accuracy of insights and learning. In the context of product pricing, AI-powered data analysis leads to automatically setting and changing prices.
Competitor monitoring
Data analysis extends to competitor monitoring, another task that AI can handle quickly and seamlessly. AI eliminates the need for manual competitor analysis, saving significant effort and providing more accurate insights for determining your prices.
Competitor monitoring software can obtain up-to-date and accurate information about competitors' prices, promotions, availability, product visuals, customer reviews, and other technical data. This can be used to establish competitive pricing strategies as well as feed into dynamic pricing. For example, if a competitor launches a promotion, the software can help you quickly adjust your prices to stay competitive.
Consumer demand
Dynamic pricing using AI is an effective way for retailers to be responsive to supply and demand based on current market conditions. Historical data is also used to help forecast and predict changes in consumer demand. This is another component that allows pricing to be dynamically adjusted, and tailored to best suit the market.
This means that instead of relying on static prices that are set within the organization, pricing is adjusted in real time according to actual customer demand.
Personalized pricing
Using all of the above, AI can personalize prices for different customer segments - even individual consumers - based on their behavior, preference and purchase history.
For example, retailers can factor in seasonality, new industry trends, changes in competitor pricing, and current supply and demand to establish optimal prices. Using market intelligence to be agile and automate pricing can increase sales and revenue, making a dynamic pricing strategy a worthwhile investment.
Implement a dynamic pricing strategy in 4 steps
There are multiple tools and plugins available to implement AI dynamic pricing, from the ‘WooCommerce Dynamic Pricing & Discounts with AI’ plugin to eCommerce software such as Prisync, Tgndata and Competera. Whatever dynamic pricing solution you choose, implement the best strategy in the following four steps:
(Source)
1. Define clear business objectives
The first step in implementing a dynamic pricing strategy is to define clear business objectives. They must be both commercially viable and also aligned with the market and customer expectations.
For example, the core objective of a high-growth startup may be to maximize revenue in the coming 12 months, with profit margin being a secondary objective. In contrast, an established retailer may want to focus on increasing profit margin instead. Regardless of the objective, it’s important to define this early on so that a dynamic pricing strategy can help reach these business goals.
It’s also important to set overall constraints, such as the minimum profit margin thresholds or the minimum amount of revenue that needs to be generated. Again, this is so that when product prices are dynamically altered, they are capable of reaching the main business objectives by falling within an acceptable threshold.
2. Identify pricing triggers
The next step in implementing a dynamic pricing strategy is to identify pricing triggers, which is understanding why consumers purchase products at certain prices and what the main price points are. This step is important for making sure your product prices remain competitive and appealing to potential customers.
Let’s say an online retailer that sells classic books wants to maximize sales and revenue but faces competition from other established retailers and the likes of Amazon. Their USPs include alternative book covers and an attractive loyalty scheme, which helps set them apart, but consumers are still price-sensitive.
This makes it important for the retailer to identify competitor book prices and adjust their prices so they fall within a minimum and maximum for the market. The retailer may want to match competitor pricing or price the books slightly below average to gain an advantage.
3. Segment products and customers
With AI dynamic pricing performing advanced data analysis, it’s possible to identify specific product or customer segments and then tailor prices for the different segments. This segmentation can be based on supply and demand, competitor activity, historical trends, patterns in user behavior, or any other data point that makes sense. This allows eCommerce businesses to create pricing strategies that meet the unique needs and buying habits of each segment.
For example, the book retailer might offer special discounts to existing customers or personalize book recommendations based on what they’ve previously purchased, which is a way to boost customer satisfaction and loyalty. In addition to this, it’s possible for AI price optimization to help maximize profits at the same time, by considering pricing triggers and the company objectives.
Another common segmentation strategy is to offer discounted prices for new customer acquisition, whether for their first purchase or an initial subscription period. Prices will increase again for repeat purchases or the remainder of the subscription. Even though profit margin was sacrificed in the beginning, profits eventually increased through customer loyalty and longevity.
4. AI price optimization models
The final step is establishing the most appropriate price optimization model. AI algorithms can accurately predict the amount a consumer is willing to pay for a given product or service, which means a business can choose the best pricing model to hit its objectives.
Leading tools for AI dynamic pricing allow eCommerce businesses to establish their strategy, whether it’s based on competitors, market demand, unique rules or promotions. As well as setting optimal prices, they can identify and fix pricing errors and facilitate experimentation.
A great way to further optimize prices to boost revenue and profit is A/B testing different prices, to find the most successful strategy. For example, deciding on a single pricing model could lead to missing out on sales, whereas experimenting with various pricing models is one way to be more competitive and strengthen the strategy.
Benefits of an AI-powered dynamic pricing strategy
The main benefits of adopting AI dynamic pricing in eCommerce are the following:
Increase revenue and profit
One of the main benefits is the impact tailored pricing can have on conversion rate, revenue and profit. It’s reported that using AI for dynamic pricing strategies has the potential to increase profitability by up to 22%, thanks to the ability to adapt to market conditions, competitor activity and demand. This alone is a major benefit of using AI dynamic pricing.
Market responsiveness
Another key advantage to using AI dynamic pricing is how it enables eCommerce businesses to be responsive and adapt prices to fluctuations in demand. For example, if demand is high and inventory is low, there’s potential to increase prices to maximize profit. Similarly, if demand is low or competition is high, prices can be lowered in response to this.
It’s reported in the Inventory Management Analytics Study that a responsive approach to pricing can lower excess inventory by 30%. Market conditions can also be forecast in advance using AI-powered data analysis, making responsiveness one of the main benefits of AI price optimization.
Boost customer satisfaction
Even though AI dynamic pricing is commercially beneficial in eCommerce, able to both increase profitability and better manage inventory, it also benefits the customer. By personalizing prices to online shoppers based on their behavior and preferences, prices can align with their needs and wants, which leads to higher customer satisfaction.
AI dynamic pricing challenges and considerations
While AI dynamic pricing offers numerous benefits, eCommerce businesses must also navigate common challenges and considerations when adopting this strategy.
Data protection
Data protection is an important consideration in today's business environment, especially with increased scrutiny of user privacy and data handling. ECommerce businesses face challenges in data collection and personalization, as they must ensure that customer data is collected and managed in a privacy-safe way. Retailers must implement robust data protection measures to comply with regulations and maintain customer trust.
Data accuracy
The effectiveness of AI dynamic pricing relies heavily on the accuracy of data. Inaccurate or insufficient data can lead to issues with insights, learnings and decision-making. This puts a lot of importance on high-quality and accurate data so that AI can optimize pricing strategies effectively.
Customer perception
It’s important to consider customers when adopting a dynamic pricing strategy, to ensure that pricing is consistent and fair. If customers perceive prices to be inconsistent or discriminatory then it can harm sales and undermine the purpose of dynamic pricing. Ensure the pricing strategy is transparent and fair to avoid this sort of customer dissatisfaction.
Changing algorithms
AI algorithms are continually evolving, which can pose challenges for eCommerce businesses that rely on AI models for optimization. Algorithm changes may affect how pricing models function, which means that ongoing monitoring and adjustments are an important part of managing a tool for AI price optimization.
Key takeaway
AI has made its way into yet another business process and with that, the eCommerce landscape continues to evolve. This time, retailers can benefit from using machine learning to optimize product pricing. By choosing a dynamic pricing tool and following the steps outlined in this article, from defining an objective through to price triggers and segmentation, it’s possible to be proactive and responsive when setting prices.
Through real-time data analysis, competitor monitoring and segmentation, AI price optimization is a key way to boost competitiveness, profit and customer satisfaction. This makes AI dynamic pricing a must-have strategy in eCommerce. It can have an even greater impact on those in competitive sectors or those who manage a large inventory of products.