Competitive Pricing vs. Dynamic Pricing: Automated Pricing Strategies in Comparison
Product ranges are getting bigger and bigger, there is more and more competition, and the distinguishing features between individual suppliers are getting increasingly smaller.
Product ranges are getting bigger and bigger, there is more and more competition, and the distinguishing features between individual suppliers are getting increasingly smaller. Due to the existing market transparency and simple comparison possibilities (e.g. via portals such as Idealo), retailers are mostly reduced to their prices. The buybox is fiercely competitive and retailers at the lower end of the search engines (or even from page 2 onwards) are hardly noticed.
Many suppliers on the market are therefore joining the price war and trying to adjust their prices “dynamically” on the basis of the respective market situation. In doing so, they resort to a wide variety of possibilities to automate this process. Providers such as priceintelligence support companies in this endeavour.
Data as the basis for automated pricing
Automated price optimisation, whether dynamic, rule-based or based on competitive information, uses a variety of data to adjust prices. The more information is used, the more dynamic the prices can be.
A few examples from practice:
- If the stock level for a product drops, it is automatically made more expensive in order to delay a sell-out until the next subsequent delivery.
- In summer or if the weather is good, some products become more expensive (e.g. garden furniture), while others are offered at reduced prices during those periods (e.g. umbrellas).
- If a supplier reduces or increases its price, some of its competitors follow suit shortly afterwards.
Competitive Pricing or Dynamic Pricing? Which automated pricing strategy fits my company?
What pricing models are currently used in the market? What are the differences, advantages and disadvantages? In this article we would like to take a closer look at two pricing models: pricing based on competitive data, so-called competitive pricing, and dynamic pricing, which is based on many internal and external factors.
This method uses data from the competition, for example sales prices, delivery times and stock levels, product ratings or data on discounts, etc., in order to determine the optimal sales price on this basis. By collecting and providing the data, price leadership (“Undercut one/all competitors by X%”) or price following (“Match my competitor’s price”) for the entire range or selected products can be automated at any time.
In dynamic pricing, many other internal and external factors influence pricing. In addition to internal data such as purchase prices, margins, stock levels and product range planning, this also includes external data such as weather forecasts, trend analyses and competitive data.
Individual requirements are decisive
Competitive pricing can therefore be a component of dynamic pricing. And it is precisely for these reasons that the boundaries between the two models are becoming increasingly blurred. Often the term Dynamic pricing model is used when a competitive pricing model is actually meant. In requirements management, it is therefore important to be clear about your goals and to make the decision for one of the models based on them. The model you choose determines how complex the necessary data basis must be in order to use it properly.
A competitive pricing model can be started quite quickly, as the further steps result from the collected data. Only an approximate orientation for the pricing is necessary, e.g. achieving a certain target taking into account a minimum margin to be reached. Since a dynamic pricing model takes into account significantly more data points, the corresponding set of rules behind it is also significantly more complex. Thus, the previous example can also be used here, but additional factors such as weather data, trends, sales figures, number of page views, etc. are taken into account, which further increase the multi-level nature of pricing. The first step is to create the data basis to obtain precisely this data.
The advantages and disadvantages are therefore evident: a competitive pricing model requires less preparatory work and can accordingly be implemented quickly – at priceintelligence, for example, within a few days without calling on valuable IT resources, but with somewhat less complexity. With dynamic pricing, the effort required to create the corresponding data streams, define the set of rules and for the set-up is significantly more elaborate, but the pricing can be carried out even more precisely.
A combination of both pricing strategies is possible as well
Often both models are used simultaneously and complement each other, for example by using a competitive pricing provider as a data supplier whose results are subsequently used further by a dynamic pricing tool. In such a case, the advantages of both models and the expertise of proven experts are used without having to laboriously build up internal capacities for processing.
With this in mind, the two experts in their respective fields, priceintelligence for the area of competitive pricing, and PriceFX for the area of dynamic pricing, announced their partnership in early 2021. Through the cooperation, clients are offered the complete process from data collection and structuring to the further use and implementation of dynamic pricing from one single source.
Would you like to benefit from our combined expertise or simply receive non-binding advice on dynamic and competitive pricing? We would be happy to look at your individual situation in a free consultation and find the perfect pricing solution for your company.