Choosing between dynamic vs. static pricing: Which model is right for your business?

Static pricing refers to a fixed pricing model where the price of a product or service remains unchanged for an extended period.

Usually, in a static pricing model, prices are determined based on factors such as production costs, competitor intelligence and analysis, and target profit margins. In this model, prices tend to be fixed over time. This means that even if an input factor changes, the prices, once set, won’t necessarily reflect those changes. Also, prices are the same for all the customer segments.

On the other hand dynamic pricing is a more flexible approach to pricing. It takes into account real-time factors such as demand, time of the day (or the month, or a year), and customer behavior (i.e. purchase and browsing history, location, favorite items, etc.).

Similarly to static pricing, dynamic pricing also takes into account competitive pricing data. However, it usually does this in a more nuanced way. This means that competitor prices are taken into account on a product-level basis and are directly implemented into your own product price calculation.

Why would you choose one over the other?

Although static pricing is usually not characterized by adaptability and may lead to revenue loss due to how long it takes to adjust prices, it can make sense in certain situations.

It’s predictable, simple, and easy to manage. This makes static pricing a potentially good option for smaller companies with not enough resources to handle the complexities of dynamic pricing.

Also, there’s an argument to be made that static pricing can lead to an increase in customers’ trust in your brand. Frequent price changes can confuse and frustrate customers.

A more stable and predictable approach is likely to build long-term customer loyalty because of one primary factor. Customers develop confidence in their decision to purchase from you. When this happens the probability that customers re-engage with your brand increases significantly.

In short, this also explains why static pricing is a good market-entrance alternative to other, more aggressive pricing strategies, and also why it works better in the long run.

However, it also comes with a few downsides.

One primary downside of static pricing is that it’s rigid and not flexible, as its name suggests.

Generally speaking, this means that you may not be able to take advantage of price sensitivity in different customer segments. Also during sales or promotions, it may take more effort to implement discounts.

Another thing to have in mind is the difficulty of adjusting to external factors, such as disruptions in the supply chain, rising costs, or seasonal variations.

When does dynamic pricing make sense?

Essentially, dynamic pricing makes sense in all other cases.

As your business grows, you will start stocking more products, segmenting your market in a more detailed manner, have more category management overhead, and face many other challenges a growing eCommerce business faces.

Take a look at Amazon for example. It is such a large online marketplace that it only makes sense for them to implement dynamic pricing.

Besides, the more your operations and business grow, the more you will have to have your competitors in mind. Tools that offer dynamic pricing implementation, usually also offer the ability to track your competitors’ prices. This is because competitor prices are one of the most important factors in most dynamic pricing algorithms.

Now, don’t take this for granted. There are many nuances when it comes to deciding whether to implement dynamic pricing into your business model or not. Some of the things you should take into account are:

• Are your stock levels changing frequently? If so, dynamic pricing may help you clear slow-moving items and maximize profits on high-demand products.
• Do your competitors keep adjusting their prices? Aggressive competition can make you feel uncomfortable. Static pricing can make you fail to capture demand in crucial times. In such cases, dynamic pricing is likely a smart option to consider.
• Does the demand go up and down all the time? If the demand for the products you are selling drastically changes seasonally, monthly, or even daily, you may have difficulties dealing with this manually with a static pricing model.
• How do your customers react to price changes? In other words, know the price sensitivity of your customers. Knowing this enables you to know how far you can go with price changes without deterring your potential buyers.
• Do you have the right tools? Dynamic pricing is difficult, if not impossible, to implement manually. The right set of competitor price monitoring and repricing tools is usually required.

If you have answered most or all of the above questions positively, then there’s a high probability that your business would benefit from implementing a dynamic pricing solution.

Summary

Conclusion

Static pricing is simple and stable. It’s a great choice for businesses that prioritize consistency and brand trust.

Dynamic pricing, on the other hand, provides flexibility and revenue optimization capabilities. It allows businesses to react to demand and market changes in real time.

When choosing the right model for your business, you need to consider the industry you are in, its competitive landscape, and perhaps most importantly — your operational capabilities. Do you have enough resources to implement dynamic pricing?

In many cases, a hybrid approach can offer a balance between control and adaptability.