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Boost Profitability By 25% Through a Great Dynamic Pricing Software

Dynamic pricing is one of those things that you feel your competitors are using against you but still feels something not achievable for your business. You are either too big or too small, the products you have are just too complicated, your product catalog is pretty diverse and extensive, or that your data is so chaotic that even thinking to sort and clean it gives you trouble.

The reality of the matter is that dynamic pricing is too good to ignore. We are not talking about a pretty little improvement: dynamic pricing can boost profitability by 25%, as per Forrester - that’s the difference between actually thriving and just surviving. Your company’s lack of bandwidth is absolutely no excuse to neglect dynamic pricing when there’s just so much at stake.

Choosing a manual approach to dynamic pricing is pretty tough. It’s highly time-consuming and prone to errors. Fortunately, there’s a huge number of dynamic pricing software on the market that can do it all for you. Combining Big Data with machine learning and intelligent algorithms, dynamic pricing software calculates and automatically optimizes intelligent prices, updating them to your price lists several times a day. It’s time to level up your company’s pricing. Here’s how.

What is dynamic pricing, and how it changes the game for competing companies?

Dynamic pricing is a kind of “price discrimination,” wherein companies charge different prices for the same product to different people. Price discrimination generally comes in three degrees:

First-degree price discrimination is where the company provides a different price for every unit it sells. It’s designed to clear up all of the consumer surplus that other transactions have left behind.
Second-degree price discrimination involves charging varying prices for the products sold in various quantities, i.e., bulk discounts.
Third-degree price discrimination involves the company breaking its customer base into different groups and then charging each group a different price.

Consumer surplus is the difference between the price a company charges for a product and the price a consumer was actually willing to pay. When Apple released the iPhone 11 earlier this year, they priced it at $699. Some might argue that as an expensive phone. But the guy waiting in line at an Apple Store at 6 am on the morning of its release might have paid $2,000, or considerably even more, to be the first person to get it.

Price discrimination does not actually work for every company. Three conditions are needed to be fulfilled:

You have to be able to identify separate market segments, each with different price elasticities.
You need to be able to keep these segments separate. Otherwise, those in high-paying segments will go past your segmentation strategy and pay less. Or, those in the low-paying segments will sell their products to the ones in high-paying segments.
Your company needs to have a certain degree of monopoly. If not, competitors will just swoop in and also start luring your high-paying customers away with better and much cheaper deals.
 
What about dynamic pricing?

Dynamic pricing is a price discrimination strategy that’s designed to enhance revenue by changing their prices with dynamic market conditions. There are different kinds of dynamic pricing. On the basic level, you have the time-honored “cost-plus pricing” strategy, that’s practiced by retailers all over the world, where prices change according to changing costs. The cost of raw materials also shoots up, the price goes up, and vice versa. It’s a weak strategy as it ignores the consumer demand and what your competitors are trying to do.

On the slightly more involved side of the dynamic pricing scenario, you have: “competitor-based pricing,” where prices change as per what your competitors are charging; “conversion rate pricing” is where the prices vary according to the conversions you are currently experiencing on your B2B eCommerce site; and the ever-popular, and highly effective, “time-based pricing,” where the prices fluctuate at different times of the day/week/month/year. Dynamic pricing software combines a number of different factors to calculate the best prices for every customer.

Dynamic Pricing: The Good, The Bad & Also, The Ugly

Dynamic pricing can create or destroy the overall profitability of a company. For B2Bs selling big items, the ability to earn maximum on every transaction is huge. Dynamic pricing keeps these companies flexible and agile, allowing them to capitalize on the opportunities as they come into existence, protect themselves from shocks, and also nullify competition by matching or even beating their prices. Slow-moving items can be shifted quickly, product launches can be properly  supercharged, and conversions can be maintained steadily, all by different prices.

Companies using dynamic pricing usually have a deeper and more nuanced understanding of their customer’s psychology. This intimate knowledge is critical at every level, informing product development, bringing in better marketing performance, and also improving the customer support. It can also be used to craft the behavioral change, moulding the customers to a company’s will, sometimes also for mutual benefit: Charging heavy prices for bus fares in peak hour, for instance, not only brings out the maximum value from commuters, it also serves to regulate the service, smooth out any of traffic spikes, and also improve the overall safety.

Dynamic pricing also has a dark side though. The very word “discrimination,” as in “price discrimination,” instills feelings of injustice and even a partial treatment, which is what exactly people feel when they discover that they have paid more for their thing than their friend did. There’s a risk of alienating buyers, creating a negative word of mouth, horrendous reviews, complaints, refunds, and even chargebacks. There’s also the possibility of triggering a price war, especially in crowded markets - a race to the bottom where profit margins get squeezed beyond their breaking point.

Implement Dynamic Pricing with a comprehensive Dynamic Pricing Software

Effective dynamic pricing needs processing of massive real-time data sets that are harvested from sources as diverse as internal sales figures (current and historical), competitors’ prices, business-specific targets, and also an assortment of market trends. Simply gathering such a huge amount of data is beyond the scope of any human pricing team, not to mention carrying out a detailed analysis needed to optimize prices at a customer level and then update thousands of prices multiple times each day.

Dynamic pricing software provides a pretty scalable solution that brings automation to all of the dynamic pricing processes. Prices get recalculated continuously and then rolled out automatically to multiple channels. It replaces slow, manual legacy systems like Excel (product pricing formula Excel) that are limited in function, have chances of human error, and are also responsible for a number of issues in the organizational structures. Dynamic pricing software resides in the cloud and also serves as a single source of pricing that’s accessible organization-wide, at any point of time and also from any device.

While there are a number of excellent dynamic pricing tools on the market, most of the businesses find that dynamic pricing software is the most impactful and generates the greatest ROI when it’s actually combined into an all-in-one CPQ (configure, price, quote) solution. CPQ streamlines the entire configuration of products before calculating dynamic prices and generating quotes in a smooth end-to-end process. CPQ is especially well-suited to manufacturers of complicated, engineer-to-order products. Still, for any business with a broad product catalog wishing to implement dynamic pricing software, CPQ will be the most powerful and cost-effective route.