E-Commerce | 7. October 2021

What does dynamic pricing mean?

Dynamic pricing is a strategy with which merchants adjust their sales prices to current market needs - a practice that has long been common in e-commerce. by

Image Dynamic Pricing

Dynamic pricing or surge pricing is nothing new. Even corner shops and the baker next door adjusted prices “dynamically”. For example, they offered bread at a lower price in the evening in order to still be able to sell it. And stationary retailers have always used the red crossed-out price tags for short-term price reductions or for bait-and-switch offers.

Industries in which dynamic pricing has been practised for a long time include the hotel industry, travel providers and airlines. During peaks in demand, such as the peak holiday season or major events, suppliers like to raise their prices. In such situations, customers are willing to dig deeper into their pockets. A classic example from the stationary trade is ski equipment, which is offered at significantly lower prices at the beginning of spring than before Christmas.

In the Statista survey “Umfrage zur Bedeutung von Dynamic Pricing im stationären Handel 2021“, around 47 percent of all merchants stated that they consider the strategy to be important for the future. Many e-commerce companies also consider this dynamic price adjustment to be necessary in competition. This has already been proven by the study “Die Wirtschaftslage im deutschen Interaktiven Handel B2C 2015/2016” by the Bundesverband E-Commerce und Versandhandel Deutschland e.V. (bevh) and Creditreform. About 40 per cent use the method regularly and often even at very short notice. The reason: the internet makes prices more transparent than ever. Today, when potential customers are googling a product, they immediately get results with price offers and can compare them directly.

How does dynamic pricing work in online shops?

Online merchants have their adjusted prices calculated using automatic algorithms. Special software solutions automatically read the competitors’ price data from databases. Price bots collect the data mainly from marketplaces and price comparison sites. The algorithms calculate the optimal price for the merchant based on parameters such as prices of certain competitors, profiles, click numbers, taxes or own costs.

Most of the time, the adjustment results are within predefined rules such as upper or lower price limits. However, some software solutions also learn with artificial intelligence and “break” the rule limits. Some merchants use the results as templates for category management. Other merchants have their prices adjusted fully automatically and in real time by the software. Frequently, mixed forms occur, whereby especially the prices for cheap products with low margins are automated.

Advantages of digital dynamic price adjustment

  • Automated adjustment to the market situation in real time
  • Automatically optimised prices
  • Higher sales due to more customers, as most customers buy online in a “price-driven” manner
  • Higher margins when prices increase less effort in pricing

What are the different types of dynamic pricing?

Different strategies come into play.

Segmented pricing: Different pricing according to customer target groups. For example, high-income or brand-loyal customers are willing to pay higher prices for more service. Price-oriented shoppers are shown the cheaper offer.

Time-based pricing: Customers accept price premiums for faster delivery or services on weekends or holidays.

Pricing according to exogenous market conditions (external influences): Here, changing competitive prices and indicators such as market shares, commodity prices, inventories or supply bottlenecks can play a role.

Peak pricing: Higher prices in times of peak demand.

Pricing factor VAT in online distance selling

The latest EU VAT reforms represent another requirement for dynamic price adjustments. They have been in force since 1 July 2021 and primarily affect cross-border online trade. Among other things, the VAT exemption for goods deliveries from third countries with a value of less than 22 euros no longer applies. The VAT of the destination country must now be paid for this. The previous delivery thresholds for individual countries also no longer apply. Merchants based in EU countries are already liable to pay turnover tax in all destination countries supplied from a total EU-wide turnover of 10,000 euros. Even small merchants quickly reach this value.

A delivery of children’s clothing or shoes to Ireland, for example, shows how VAT in the destination country can affect pricing. In the island state, these goods are taxed at zero per cent up to a certain size. If the merchant is not aware of this and includes the standard tax rate of 23 per cent in the gross price, he charges the customer too much. And he pays too much to the Irish tax authorities.

In short, it is important for online merchants to know and correctly apply the right VAT rates on all their products in the EU-27. Once correctly assigned, they represent an optimal calculation basis for the merchant. With its VATRules, eClear offers a VAT database with over 1.2 million tax codes and 300 thousand exceptions for all EU-27 plus the UK.

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More on the subject: Cross Border E-Commerce