There is no doubt that Amazon is the world’s leading e-commerce company. However, customers, competitors and industry watchers were surprised at the company’s aggressive dynamic pricing strategies in April. A report published by price intelligence firm 360pi Corporation revealed that the e-commerce giant altered the price of a wireless router eight times on a single day (April 29th, 2014). The price of the device fluctuated between $185 and $200 within 24 hours. Though the company used the dynamic pricing in the past, this aggressive technique has attracted a lot of attention.
According to the report, Amazon has been estimated to change their prices more than 2.5 million times a day compared to their rivals Best Buy and Wal-mart who make around 50,000 price changes during a month. It was also found the e-commerce giant altered the prices of 15% to 20% of its inventory in a single day. According to the vice president of marketing for 360pi, the price activity of the retailer depends upon the product. For example, Amazon generally applies few price changes for electronics product as it has already gained a significant share in this category. At the same time, the opposite applies to home renovation products as this is a category that Amazon seems to be targeting to increase its market share. The e-commerce site also alters prices according to the time of the day when the consumers mostly shop for a particular category (for example, more frequent price changes for video games in the evening than in morning).
Dynamic Pricing – Benefits and Challenges
Why do e-commerce sites indulge in such aggressive pricing techniques? Dynamic pricing involves the changing of prices based on the circumstances and estimated user demands. From search history to previous purchases and customer locations to general tastes, this technique allows business owners to personalize their offers on a user to user basis. They collect the necessary information for personalization initially from the cookies (text files that a website drops on users’ machine whenever they visit the site). They then use sophisticated Business Intelligence tools for predictive analysis. Here are the major advantages of using dynamic pricing strategies:
- The consumers will be encouraged to buy the products when they see the prices are lower, leading to stronger and quicker sales
- If the customer base has been segmented and analyzed properly, e-commerce stores can apply specific demographics, especially in terms of median household income and identify which suburbs are financially healthier. This can help them fix different prices to increase their margin
- With frequent price changes, a business can compete with other national businesses and local retailers who also employ aggressive pricing policies
- Dynamic pricing is widely accepted and is legal
Though dynamic pricing can be useful to boost online marketing, implementation can be a challenge due to the following reasons
- Enticing for customers with price changes is not always easy. Firstly, many consumers are not aware of regular price changes. Also, consumers may not be thrilled at observing a product that become cheaper or more expensive within minutes
- Data driving pricing decisions should be accurate and it is very important for retailers to ensure no bad data makes it into their systems
- Dynamic pricing models are based on algorithms and retailers have to take stringent measures to minimize algorithm mishaps and develop policies that can manage the mishap results well
- Understanding ever-changing customer behavior is very important when applying price changes. Otherwise, the price change intended to improve sales may end up impeding it
Aggressive dynamic pricing is a vital element in Internet marketing. However, many consumers consider the practice unfair. Only an intelligent pricing policy that does not irk your audience can bring dividends to your bottom line.