Dynamic pricing algorithms, also known as algorithmic pricing, are all about setting price tags based on the insights received from artificial intelligence and machine learning. In short, dynamic pricing is all about setting different prices on products and services based on the given market changes. One can say that the practice makes pricing dynamic and flexible, which proves to offer companies a greater degree of control over their price management strategies.
Coupling dynamic pricing with modern technologies gave the world algorithmic pricing, which took dynamic pricing to whole another level. Further, we will show why dynamic pricing algorithms are a must for companies and where they will take companies in the nearest future.
Why the fuss about dynamic pricing?
Dynamic pricing has been on the market since the 1980s. If a business wanted a new pricing strategy in the previous decades, they would hire a consultancy agency. In such a case, it would take an agency weeks and sometimes months to develop a decent pricing strategy that will help keep the business competitive in a changing market environment. Essentially, there always were two foundational approaches toward dynamic pricing.
First, meet penetration pricing. It is about offering prices lower than competitors. Such an approach is crucial when a company enters the market for the first time and wants to differentiate its product and brand. The key focus on penetration pricing revolved around increasing customer loyalty. If you want to read more on the phenomenon, visit this website.
Second, there is premium pricing. An approach opposite to penetration pricing. It is based on the premise of selling the product for a higher price while representing it as unique. While the previous method is differentiated through lower prices, this one focuses on higher prices. However, there are particular disadvantages of premium pricing that must be considered.
Dynamic pricing algorithms revolve around penetration and premium pricing. However, the approach uses much more sophisticated instruments. Respectively, with algorithms entering dynamic pricing, many companies received a massive opportunity to expand the outreach of the phenomenon and improve its effectiveness.
A new recipe: algorithms enter dynamic pricing
The new pricing era has begun: dynamic algorithms are used by all types of retailers across the industries. In addition, algorithms offer flexibility, which is extremely important for companies with different products in their portfolio. Along with the ability to exist in other industries, dynamic pricing algorithms can target various customer groups by presenting group-appropriate pricing.
With algorithms entering dynamic pricing, the method became much more technological. For instance, one of the examples of how the notion can be used stems from the availability of tools like dynamic pricing software. It uses algorithms to search for particular data points and compare them within the existing library of given pricing scenarios to determine the pricing strategies that meet the desires of a business. While algorithmic pricing is beneficial, it is important to understand how the system functions in the first place.
What about functionality that makes them unique?
Dynamic pricing algorithms do their job with two key components.
- The first one is written instructions. A group of technical experts uses artificial intelligence and machine learning as the foundational tech stack. Within the systems, they write a set of instructions that guide the actions of algorithms. For example, algorithms can be programmed to collect, analyze, and synthesize particular data points.
- The second one is the data algorithms work with. Keeping that in mind, experts feed the algorithms with several key types of information. While it is all about pricing, data on historical sales play a major role. In addition, algorithms use data on price points, the demand curve, price-elasticity function, and other factors.
At this point, algorithmic pricing uses artificial intelligence and machine learning fueled by detailed data to determine the best pricing strategies for a given situation.
When to utilize dynamic pricing algorithms?
Knowing how dynamic pricing algorithms work is not enough to employ the approach reasonably. Luckily, through the years of practice determined by a hands-on approach, several primary strategies for using the method were designed. The crucial thing to understand is that such techniques work when certain prerequisites are met.
- Profit and marginality. Many companies use pricing strategies for the sake of profit maximization. One can easily increase profit margin with dynamic pricing. However, doing that unreasonably can lead to the company’s marginality. At this point, algorithms help determine pricing strategies that will both increase profits and keep marginality at bay.
- Market cannibalization. Many companies fear presenting new products because such an action can drive attention from the product in the given portfolio. Dynamic pricing algorithms set a particular threshold for new products. It helps keep the interest for both new and old products.
- Customer satisfaction. It is no secret that many businesses want to increase customer satisfaction, which makes consumers loyal and ensures sales volume grows. Prices are a direct method of boosting customer satisfaction. Nonetheless, setting prices too low or too high might scare customers away. At this point, dynamic pricing algorithms determine the optimal price. It will boost customer satisfaction and ensure the company receives its profits.
Algorithmic pricing is best applicable to the strategies mentioned above. Still, there are many additional situations in which dynamic pricing algorithms can offer massive benefits.
Machines help with dynamic pricing
Algorithm pricing has already proven its worth. Many experts argue that dynamic pricing will be everywhere. What drives such anticipation? Coupled with modern technologies, algorithms become much more sophisticated and, what is more important, easier to use.
One can expect algorithmic pricing to become even more automated. In the end, it will result in dynamic pricing transforming into a computerized approach to pricing. For example, current markets change almost every hour. To analyze all the changes and align pricing strategies would take massive processing capabilities. In the future, nearly every company will have access to such capabilities.