Dynamic Pricing: The Exact Impact On Retail Business

Most retail companies realize that dynamic pricing is good for business. But what is the exact impact it might have, in numbers? And what processes and workflows does it influence? All important data and studies in one place.

Dynamic pricing and revenue/profitability

There are a number of studies that show the correlation between using dynamic pricing and company performance. The impact may go as high as 22% increase in profitability.

Here’s a list of studies that prove the point:

Dynamic Pricing and Revenue Management in E-commerce: A Review” (2015) found that dynamic pricing can increase revenue and profitability by 5-10% on average.
“Dynamic Pricing and Revenue Management: A Survey of Research and Practice” (2013) by Talluri and van Ryzin found that companies that implemented dynamic pricing saw a 3-7% increase in revenue and a 2-5% increase in profitability.
“Dynamic Pricing and Revenue Management: Theory and Practice” (2010) by Phillips and Chang found that dynamic pricing can increase revenue and profitability by 5-20%, depending on the industry and product/service.
“Dynamic Pricing in the Airline Industry” (2009) by Zhang Di found that companies that implemented dynamic pricing saw a 5-10% increase in revenue and a 3-7% increase in profitability.
“Dynamic Pricing Strategies for Multi-channel Retailers” (2008) by D. Ramanathan found that dynamic pricing can increase revenue and profitability by 4-12%, depending on the channel and product category.
“Revenue Management and Dynamic Pricing: An Overview and Future Research Directions” (2007) by Talluri and van Ryzin found that dynamic pricing can increase revenue and profitability by 5-15%, with some studies reporting even higher increases.
“Dynamic Pricing in Online Retailing” (2005) by Chen Li found that dynamic pricing can increase revenue and profitability by 2-8%, depending on the product category and pricing strategy.
“Dynamic Pricing in the Presence of Inventory Considerations: Research Overview, Current Practices, and Future Directions” (2002) by Bitran and Caldentey found that dynamic pricing can increase revenue and profitability by 5-20%, depending on the inventory levels and pricing strategy.
“Dynamic Pricing Strategies: Theory, Evidence, and Practice” (2000) by Gallego and van Ryzin found that dynamic pricing can increase revenue and profitability by 5-15%.

Overall, all available studies suggest that dynamic pricing can be an effective pricing strategy to increase revenue and profitability across various industries and product categories. The actual impact of dynamic pricing on revenue and profitability will however vary depending on the specific context and implementation details.

Meaning, if you have clean data and fast repricing engine that feeds you with fresh and relevant information, the chances of getting +22% increase in profitability is much higher than when your vendor provides you with wrong several-days old prices. Read more on How to choose the best price monitoring software.

Repricing and inventory management

Another business process that gets impacted more than anything else by the usage of dynamic pricing is Inventory management.

Here’s what has been found so far.

“Dynamic Pricing and Inventory Management in a Retail Supply Chain” (2019) by Sun and Gao found that dynamic pricing can improve inventory management efficiency by reducing inventory holding costs and increasing inventory turnover rates.
The authors used a mathematical model to compare the performance of two pricing strategies: static pricing, where prices remain constant over time, and dynamic pricing, where prices are adjusted based on market conditions.
The findings of the study suggest that dynamic pricing can improve inventory management efficiency by reducing inventory holding costs and increasing inventory turnover rates. Specifically, the study found that:

Dynamic pricing leads to lower inventory holding costs. By adjusting prices based on market conditions, dynamic pricing can help retailers to better match demand and supply, which reduces the risk of overstocking or understocking. As a result, retailers can reduce inventory holding costs, which can be a significant expense.
Dynamic pricing leads to higher inventory turnover rates. By adjusting prices based on market conditions, dynamic pricing can increase sales and reduce the time that products spend in inventory. As a result, retailers can increase inventory turnover rates, which can improve their cash flow and profitability.
Dynamic pricing leads to more efficient inventory management: By adjusting prices based on market conditions, dynamic pricing can help firms to manage their inventory more efficiently. Specifically, the study found that firms can reduce their inventory by up to 50% by using dynamic pricing, while maintaining the same level of service levels.

The study also found that the benefits of dynamic pricing depend on the level of demand uncertainty and the lead time of the supply chain. In general, dynamic pricing is more effective in environments with higher demand uncertainty and shorter lead times

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“The Role of Dynamic Pricing in Managing Inventory Levels: An Empirical Investigation” (2016) by Kalyanaraman and Monteiro found that dynamic pricing can improve inventory management efficiency by reducing inventory holding costs and increasing sales.
The authors analyzed data from a large retailer that implemented dynamic pricing in its online channel.
The findings of the study suggest that dynamic pricing can be an effective strategy to manage inventory levels by reducing inventory holding costs.

Specifically, the study found that:

The reduction in inventory holding costs can be substantial. The study found that the retailer in the study reduced its inventory holding costs by 9.6% due to the use of dynamic pricing. This reduction in inventory holding costs was driven by a decrease in the amount of inventory held by the retailer.
The study also found that the benefits of dynamic pricing depend on the level of demand uncertainty and the degree of competition in the market. In general, dynamic pricing is more effective in environments with higher demand uncertainty and lower levels of competition.

Dynamic pricing and brand

Even if your company doesn’t use value-based pricing you still can’t avoid your customers having a certain perception about your prices. Therefore, the prices you use will impact the way they think about your company, their expectations, and the loyalty level.

Several research studies have shown that the impact of dynamic pricing on the brand perception and loyalty level can be highly positive.

“Dynamic Pricing and Its Impact on Brand Value” (2019) by Zhao and Tang. This study investigates the impact of dynamic pricing on brand value using a game-theoretic model. The authors find that dynamic pricing can improve brand value by 20% through enhancing customer perception of product quality and increasing brand loyalty.
Dynamic pricing can enhance customer perception of product quality: by adjusting prices in response to market conditions, dynamic pricing can help signal to customers that the company is responsive to their needs and committed to providing high-quality products. This can improve customer perception of the brand and enhance brand value.
Dynamic pricing can increase brand loyalty. By offering personalized pricing and discounts, dynamic pricing can help build customer loyalty and encourage repeat purchases. This can increase customer lifetime value and enhance brand value.
On the other hand, there are studies that show a possibility of negative correlation between loyalty/brad perception and the access use of dynamic pricing.
“The Effects of Dynamic Pricing on Brand Equity” (2019) by Wang Chu. This study examines the impact of dynamic pricing on brand equity using survey data from Chinese consumers. The authors find that dynamic pricing has a negative impact on perceived quality and brand loyalty, which in turn reduces brand equity. However, they also find that the negative impact of dynamic pricing on brand equity can be mitigated by providing transparent pricing information. When consumers know what to expect they don’t feel cheated.
“Dynamic Pricing and Its Effects on Brand Equity” (2018) by D. Völckner. This study also investigates the impact of dynamic pricing on brand equity using data from a field experiment conducted in the German airline industry. The authors find that dynamic pricing has a negative impact on brand equity, which is primarily driven by consumers’ perception of fairness and trust in the company. However, they also find that certain simple actions can mitigate the negativity associated with the price perception. For example, if the company uses price guarantees consumers stop stressing out about price adjustments.

In general, the correlation between dynamic pricing and branding is more complex than the correlation between dynamic pricing and profitability growth. However, if company management knows what to expect and takes steps to mitigate possible negative aspects, using dynamic pricing can be an extremely efficient way to increase overall business performance.

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