Dynamic pricing

What dynamic pricing means

Dynamic pricing means adjusting prices automatically to conditions instead of holding them fixed in the catalogue. Those conditions can be demand, stock, competitor prices, weekday, device or customer group. The goal is always the same: moving the price closer to willingness to pay than a rigid list ever can.

The idea comes from aviation and hospitality, where capacity cannot be stored. In retail that justification only holds in part, because goods can be stored. Even so the practice is widespread, especially for electronics, spare parts and items whose prices are watched closely.

Four mechanisms at a glance

• Rule based: Fixed rules such as a floor price, a gap to the cheapest competitor or a discount after a given shelf life. Easy to understand, easy to audit.
• Competitor based: The price follows other sellers for the same identifier. Common for marketplace items and visible through price comparison services.
• Demand based: The price follows sell through speed, season or utilisation. Works only with reliable sales data.
• Model based: A model estimates willingness to pay per segment, often using device, channel and purchase history.

The legal framework

Price fixing with competitors is prohibited, and that includes exchanging price data through shared software. Analysing publicly visible competitor prices for yourself is allowed. In addition the German price indication rules apply: if a price is advertised that is undercut, the lowest price of the last 30 days must be stated. Personalised prices are not forbidden as such, but proving they are non discriminatory is practically impossible to document, which is why most shops stay away.

Where the limits are

Technically the approach is demanding, because a lot can happen within a short time: price changes must reach every channel, marketplaces, price comparison sites, carts and returns. Economically it is bounded, because a shop usually gains either volume or price per unit, rarely both. And psychologically it is delicate, because customers watch prices. Selling the same item higher within a few days loses trust, and trust is more expensive than the amount gained.

A second risk path is the price spiral. When two sellers apply the same rules to the same competitor prices, the price drops in steps below margin without anyone having decided it. A fixed floor price per item and a cap on changes per day are therefore mandatory, not optional.

How to start

A sensible start is small: an analysis of which items are price sensitive at all, plus a rule based mechanism with a documented floor price. Then a group of items is observed over a few weeks, with margin, units sold and return rate as control figures. Only when that holds up is it worth moving to models with more features.