To understand the concepts of ECommerce, it is always good to know how a particular situation applies in the physical world. So let's begin with an example. You are visiting a community store to buy, say shirts and trousers. You make your choices and start bargaining a deal. The store owner knows you from the past since you are quite a frequent visitor. Generally, the store owner would give away a discount of 10% on your total bill. However, today, you've come along with a friend who is visiting this store for the first time. The store owner gives an additional 5% off on seeing a new prospect with you. On further insisting to do the best price, the store owner gives you an offer, 20% flat discount, only if your total bill crosses $200. That makes the deal irresistible for you, and suddenly the friend also jumps in to buy with you.
Take a close look at this story. See how the store owner swiftly moved around the pricing offers for someone she knows (personalization) and for someone she doesn't (dynamic). Should the store owner not move around the prices, i.e., with fixed pricing, it wouldn't push you to buy more. So we are at concept of dynamic pricing. The store owner used price discrimination by assessing your loyalty and ability to go for an up-sell.
What is Dynamic Pricing in ECommerce?
In ECommerce, your customers are online, and they expect a similar experience when it comes to price bargain. The customers move among different online ECommerce platforms to grab the best deal. The ability of the ECommerce platform to move around the pricing offers dynamically according to the buyer's buying propensity and other parameters, is dynamic pricing. Dynamic pricing includes gradually giving away the best deal at run-time and blending it with the recommended product/ service offers that fetch the best overall deal for the customer.
How does AI Help in Doing Dynamic Pricing?
Ability to capture customer behavior insights is possible with the help of marketing technologies. The best AI platform helps ECommerce companies learn the buyer behavior pattern. Based on the buying pattern that the algorithm learns, it can associate a specific buying propensity score to each customer. The buying propensity scoring is using multiple parameters such as the number of visits, level of product information consumption, user profile, day of the month/ week/ year. Based on the propensity of buying the AI algorithm can unlock a specific offer price for an undecided customer so that buyer moves to the final stage of the purchase. AI in pricing helps in making a decision on particular offers to be extended out. AI can learn which products to recommend to each prospective customer so that their gross cart value goes up for a further discounted rate. AI can help avoid customer alienation problem by offering discount benefits to all the customers.
Dynamic Pricing Vs. Personalized Pricing
Personalized pricing is when the prices of merchandise vary just based on the buyer's persona. While dynamic discounting is supposed to change the pricing based on anything and everything except the buyer persona. The story we shared at the beginning here is an example of personalized pricing and dynamic pricing blended. Following a purely personalized pricing strategy could lead to explicit pricing discrimination. The winning strategy is to blend these two. The prices vary in both the cases; therefore let's call this a dynamic pricing. An AI platform can help ECommerce companies with an ability to move around the prices based on buyer parameters and non-buyer parameters.
Benefits of Dynamic Pricing in ECommerce
A vital advantage of the dynamic pricing is that you make most of your customers' wallet share during a specific transaction. During the buying journey, the customer is walking towards you, and with dynamic pricing, you walk towards them with one offer at a time.
- Avoid Cart Drop-off: Customers get a sense of reality when they hit the point of payment in ECommerce. So delighting customers with a special offer right at the payment stage helps reduce the number of cart drop-offs, improving the conversion ratio.
- More Repeat Buyers: Well, as machines learn with AI, humans learn with time and attempts. Dynamic discounts help buyers perceive that you always have some surprise offer for them. The surprise element helps you you get them to come back to your ECommerce platform and buy more.
- Increase Profits: When you are giving static offers for everyone, you are leaving money on the table for those who have a higher willingness or propensity to pay than your offer. Everyone must benefit the discounts, but the buyers earn the level of discount based on their buying propensity and other parameters, in the dynamic pricing. Also, based on seasonality for high demand, low supply, the discount need data-driven controlling. Dynamic pricing with AI helps ECommerce save the buck there.
Any additional dollar you make on similar purchases is adding directly to the incremental profits, and dynamic pricing works closest on two specific goals. The primary goal is to deliver a perfect customer experience so that customers feel like coming back and they get used to it. The second goal is to ensure that you have done your best to execute the most profitable transaction at a specific point in time.
The best AI platforms help you predict which customers have a higher likelihood of buying and at what price. It can also predict when they are likely to purchase and which recommended offers will help you make an up-sell. Datoin is an automated machine learning and AI platform for ECommerce companies to try dynamic pricing using AI.