Dynamic pricing or price optimization is the concept of offering goods at different prices which varies according to the customer’s demand. The pricing of the commodity can be done on the basis of competitor’s pricing, supply, demand and conversion rates and sales goals. The practice of Dynamic Pricing is being widely adopted in E-Commerce.
Machine learning algorithms should be able to efficiently automate pricing decisions to maximize profits, as they can perform pricing decisions using sophisticated calculations and predictions, by putting all available data into perspective, and change their pricing strategy to best adapt to a dynamic environment.
Consequently, a considerable amount of research trying to solve these hard pricing problems by machine learning has been performed, and many predict that pricing done by machine learning algorithms is the future of pricing
What is Dynamic Pricing?
Dynamic pricing, a strategy which enables businesses to provide flexible prices for products and services is now catching on across hospitality, retail, travel and entertainment industry segments. Whether the aim is to stay profitable, fill up an airplane or sell as many sports tickets or products online as possible, companies today are using dynamic pricing to achieve their business goals.
The art of dynamic pricing is sometimes also referred to as individual level price discrimination, revenue management and yield management. Customization of the inventory goods by segmenting the customers on the basis of product choice and thus proffering different prices to them is dynamic pricing.
It is also referred as real time pricing, wherein value of a product is determined by the current market conditions under commercial transactions.
While this model has been in existence for several decades, it is only now that is gaining momentum, and is likely to grow more pervasive in the years to come.
The Benefits of Dynamic Pricing
- Greater control on Pricing Strategy
- Enabler for Growth in Revenue
- More precise, SKU level prices
- Faster response to demand fluctuations
- Price changes take into account more factors including customer’s price perception, leading to long terms increases in sales or profits
How does Dynamic Pricing Work?
Dynamic prices are determined by rules based or self-improving algorithms which take into account some of the variables below used to make pricing decisions:
Must-have’s in Pricing Optimization
- Analyzing profitability
- Automated price management
- Forecasting upcoming price trends
- Customer analysis for personalized pricing
- Market analysis for price competition
- Sufficiency to adapt different situations and change
Core Functions in Dynamic Pricing
A. Information Gathering Functions
B. Internal Organizational Functions
An Approach to build a Simplistic Dynamic Pricing Model for E-Commerce
Summary
Hope this blog post has helped you with a basic understanding of Dynamic Pricing, it’s Benefits, the Core Functions and the variables that are involved and the steps for Building a Simplistic Dynamic Pricing Model.
Thanks for reading through this blog post. Any suggestions for further improving this would be cheerfully solicited.