What is Dynamic Pricing for Amazon Sellers?
You must have heard about fixed pricing, right? Okay, if you’ve not, look at this scenario – if you go to the market to get a product, after looking around and found the exact product, the next thing is to go determine the price which is where haggling and bargaining come in. However, if there is a price tag on the product, it means it is fixed and there is no room for bargaining – this is what fixed pricing is all about. In essence, fixed pricing is a business strategy of which a product price is fixed and established for an extended time frame.
Having understood what fixed pricing is, you should have an idea of what dynamic pricing is right? It is possible you want to assume that dynamic pricing is when there is room for bargaining but that is not entirely true. Dynamic pricing is better defined as a business strategy which allows the price of a product change sporadically. With dynamic pricing, the price change is dependent on the actual cost of the product itself and the price of your competitor per time. You got that better, right?
Dynamic pricing has existed before now as it was first used in the early 80s by American airlines. However, it becomes very popular today all thanks to the internet and e-commerce. One of the largest retailers in the world, Amazon has also joined the trail by adopting the use of this pricing strategy called dynamic pricing which can be utilized whether you want to engage in the Amazon FBA business or you are considering starting an Amazon business on your own. If you are an Amazon seller, and you haven’t heard of what dynamic pricing is or you don’t fully understand, well, you’ve come to the right place. I would be leading you by the hand to have a general lay of what dynamic pricing is and how it can benefit you as an Amazon seller.
How Does Dynamic Pricing Work?
It is one thing to know what to sell on Amazon and it is another thing to know how to sell on Amazon. You must have noticed that price change on Amazon has recently been unstable, right? Most large retailers change the prices of their products almost every 10 minutes but the truth is that small retailer can also adopt this strategy as one of the most assured ways to succeed in the e-commerce business. However, the question really is how does it work?
Technically, it is a pricing strategy that employs the use of a variable rather than fixed prices for the sake of increasing an organization’s profit margin. Most times, it is called discriminatory pricing due to the fact that it allows you the seller to fully maximize your profit with your customers. Here, the best prices are usually calculated so many times within the period of an hour through the use of different data source – external and internal data variables.
The internal data variable consists of the stock level, sales data, etc while the external data variables are the price of your competitors and the results you get from google analytics. These pools of data are then brought together and analyzed to get the perfect price for each product per time.
It is important to note that you will not attain maximal results from employing the use of dynamic strategy if you do not have an e-commerce strategy. By e-commerce strategy, I mean if the aim of your business is to maximize revenue or penetrate the market, etc. Your strategy is going to be analyzed alongside the stated data sources by a pricing software to get the best price to sell a product per time. If you don’t have an e-commerce strategy, you can visit an e-commerce consultant. Note that you won’t yield desired results if you start selling on Amazon without a strategy.
Types of Dynamic Pricing
Research has it that incorporating dynamic pricing in your retailing business would produce a growth yield of ten to twenty percent compared to fixed pricing. However, there are different types of dynamic pricing and understanding them would help you make the best choice for your business.
- Rule-based pricing system
This type of pricing system involves the adjustment of prices based on some certain laid down rules rather than on what the products aim to offer. An example of such rule is following the prices change of your competitor or deciding that your product price does not go beyond 30%
- Value-based pricing system
This is the type of system that considers the price elasticity of the product before determining the best price for sale. By price elasticity, I mean the response of your customers to the change in the price of a product in relation to the demand and supply of such product.
While it is advisable to go for the value-based pricing system to the rule-based pricing system, it should be noted that the latter has its way of adding value and this is done by implementing pricing rules based on your stock levels. This would help you protect your margin as a competitor can be selling at a lower price because he has excess product. It would therefore not make sense if you follow suit and you would end up running at loss. Hence, the best practice is to incorporate both of the pricing systems.
Benefiting from dynamic pricing depends largely on your competitor’s pricing strategy. If your competitor is employing the use of dynamic pricing and you are not, it most likely would mean that you would lose sales. In other to measure the value dynamic pricing can bring to your business, you can compare your pricing with your biggest competitor systematically. You can also determine to what extent other competitors react to the changes you make.
What are the Advantages of Dynamic Pricing?
- Profit Maximization per client
The best part of dynamic pricing for you as an Amazon seller because you can maximize the amount you make with every of your customer. For instance, if there is a low demand of your product, you can reduce the price to encourage your clients to buy from you and at the same time, you are ensuring none of the products stay over due. So also, if there is a high demand for your product, you can also increase the price of the product according to its demand. This is usually common with seasonal products. For instance, there would be a higher demand for Christmas trees during December than in other months. In line with the demand, it is also the best time to increase the price.
- Increases the demand for your product
Dynamic pricing helps you rank better than your competitor. The truth is that everyone wants to buy the best products at very affordable rates. If your products are of high quality and sell less, you definitely would be your customer’s go-to. However, you cannot know the price to set your products if you do not monitor your competitors.
What are the Disadvantages of Dynamic Pricing?
- Customer alienation
This is the major disadvantage of dynamic pricing as nobody wants to find out that deal, they thought was their best turned bad. For instance, if you discover that the product you bought last week now sells for half the price, how would you feel? That is how it is for your customers too. The best way to go about this is to always remind your customers that the prices are not static. Let them have an idea of how the price is being determined.
- Increase in competition
The implementation of dynamic pricing on Amazon has increased the competitive rate among amazon sellers and without doubt, if you are not competitive enough, you are definitely leading your customers to your competitors. So, you have to be really good with the use of the needed technological software if not, you might need to hire a professional.These disadvantages are minor since we can work around it. We would advise that you employ the use of dynamic strategy as an Amazon seller, however, in a controlled way. If you are able to keep a low and competitive price, you just might feature on the Amazon buy box. Have you made use of dynamic pricing as an Amazon seller or you just want to? Drop your reply in the comment box below and let us discuss it.
About the Author:
Nick Uresin is the Founder and CEO of ArgoMetrix, a New York based software and consulting company established in 2013. Nick is an Entrepreneur, Electronics, Communications and Computer Science Engineer, who has a passion for problem solving with technology. Nick built an online retail company with annual revenues of over $10 million. He developed his vision to organize the knowledge and technology he developed to become a large Amazon Seller and provide it as a service to manufacturers and sellers of consumer products. Let's get social! Follow us and get ArgoMetrix's latest updates on Twitter, Facebook or LinkedIn.