Optimizing profit by Dynamic Pricing

Dynamic Pricing is a pricing strategy designed to use flexible prices depending on market offer and demand. This technique is known in certain industries such as Flight booking, in which prices change depending on certain issues such as booking in advance and available sits. The mentioned strategy is not exclusive on the airline industry, and it can be used in other many industries like retail. The first retailer applying this strategy is Amazon, which achieved a great increase in profit by estimating the optimum selling price of its most popular products. In essence, the invoicing of an e commerce is just the number of units sold times its final price, thus if we can maximise any of this points we will be boosting our profits.

How can we apply this strategy properly? As we mentioned at the beginning of this article, dynamic prices have to give response to the offer and the demand on a particular moment. In order to do so, we ought to know on one hand the reference price of a product (offer) and on the other hand the impact of this price in our shop (demand). Both issues can be measured using an intelligence pricing software, as we will explain in following lines.

The first step would be to know, for each one of our products, what is the reference price indicated by the competition. Based on this price and applying our pricing policy we will change our selling prices, analysing its impact on generated profit. Is the sales increase we got through a decrease of price big enough to increase our profit? In this case the intelligence pricing algorithm will adjust our strategy in order to change prices to achieve a point in which our sales and selling price are generating maximum profit.

We can simplify the previous point saying that Dynamic Pricing is just a succession of A/B test in our products prices, estimating by each one of them what is the ideal selling price.

Knowing and understanding the meaning of the data produced by our business is essential to optimize our systems.