It’s a phenomenon every driver is familiar with: If you refuel after work in the evening, you will often end up paying a different price for a gallon of gasoline than you would have had to shell out that morning – and the price may be a few cents more or less at lunchtime, too. Prices for plane tickets and hotel stays often develop dynamically, too: Practically the only time when all passengers sitting on one row of an airplane will have paid the same price for their flight is when they have all booked together.
However, dynamic pricing - i.e. variable adjustment of prices depending on the time of day, the region and/or other factors - is not just limited to the transport sector: Online retailers in particular are starting to apply this strategy more and more frequently. “E-commerce is increasingly facing the challenge of determining the ‘right’ price for a product or service,” says LBBW analyst Guido Zimmermann. He examined the phenomenon of dynamic pricing together with consumer analyst Gerold Deppisch.
Online retailers are increasingly setting prices dynamically
As with so many other aspects, the US online retailer Amazon has taken a pioneering role when it comes to dynamic pricing. In April 2017 alone, for example, the company made more than 3.6 million price changes on its German website amazon.de. This is shown by the repricing barometer prepared by the e-commerce service provider metoda, which examines price activity in German e-commerce based on the offers placed on product search engines. According to a survey by the credit reporting agency Boniversum and the German E-Commerce and Mail Order Association (bevh), around 40 percent of online retailers and mail-order companies in Germany use dynamic pricing as a tool (see chart).
Dynamic pricing in e-commerce
Wide range of criteria for dynamic price adjustment
“Dynamic price management can firstly help companies sell off products in a targeted way and secondly exploit sales and margin potential,” says analyst Deppisch. Since it is virtually impossible to adjust the prices of an entire product range manually at short intervals – as some gas stations still do today – online retailers make use of computer programs that make changes automatically based on various parameters. Possible criteria include the time of day or seasonal factors. For example, it would be conceivable to offer products at lower prices in the daytime to boost sales during this weaker selling time – and then to raise prices again in the evening, when most Germans make their online purchases. The same applies to periods that traditionally have high sales, such as the Christmas season.
Another commonly used option is to base pricing on competitors’ prices. For example, retailers can make a deliberate decision always to offer products at lower prices than the competition in order to gain market share. In addition, online mail-order companies can base prices on the level of demand for a product, while also incorporating its availability at other online shops in the pricing. These different rules can be combined, resulting in complex models for pricing – especially since demand and competition considerations are also being joined by a growing focus on each customer’s individual purchasing behavior.
Customer behavior determines pricing
Personalized pricing goes a step further. In the era of big data, online retailers have the possibility to get to know their customers better than ever. Based on a customer’s past orders and current searches, it is already possible to put together a relatively accurate picture of this customer – which can also be included in the pricing.
There are also software solutions for collecting and analyzing the data. “The aim is to offer the right customer the right price at the right time,” as Dr Guido Zimmermann puts it. For example, a customer who orders new electrical devices as soon as they appear is likely to be less sensitive to price, meaning that discounts for this customer do not make as much sense from the online retailer’s perspective as they do for price-conscious customers. Some customers may even be willing to pay a higher price to be the first to get their hands on a new, trendy device.
"The aim is to offer the right customer the right price at the right time.” - Dr. Guido Zimmermann, Senior Economist at LBBW Research
Not everything that is possible is useful
However, not everything that is possible with individual pricing is actually advisable. For example, a number of online shops have already come in for criticism because users who ordered using a smartphone or tablet from a particular manufacturer had to pay higher prices for the same product than other users. In purely legal terms, there is nothing stopping this: The German Price Quotation Regulation does not stipulate that all prices must be the same at all times and for all buyers. However, methods of this kind are likely to be perceived as unfair by the customers concerned and may harm the company’s reputation. A more promising approach might be to offer individual discounts, ideally combined with personalized product recommendations.
So dynamic price management can certainly be an intelligent way for retailers to gain a competitive advantage in the fast-paced world of online business – provided they pay attention to potential pitfalls. Ideally, this will then benefit both parties: the retailer and the customer.