Amazon’s Dynamic Pricing Strategy: How It Balances Customer Trust and Profitability

Advancements in technology have enabled access to more relevant data for better decision-making. This has led to improvements in pricing, especially for eCommerce businesses. In this blog, we discuss how Amazon, the leader in the eCommerce retailer, has leveraged dynamic pricing using technologies like AI.

What is dynamic pricing?

Dynamic pricing is a strategy adopted by online businesses where the prices of products and services are modified in real-time based on several factors. Dynamic pricing is also of various types based on when and why it is implemented.

For example, dynamic pricing may be used during holidays, and in times of high demand for transport rentals. The demand and supply conditions, competition & customer behavior influence dynamic pricing. This strategy was is popularly employed in the travel and tourism industry and can now be found in other industries.

Amazon’s dynamic pricing strategy

Amazon is well-known for its dynamic pricing strategy. Also known as the repricing strategy, this method has helped Amazon become the biggest online retailer platform, selling to over 300 million active customers globally.

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Reports say that Amazon adopts a price change every 10 minutes, making it about a whopping 2.5 million times a day. A high level of competition necessitates frequent price changes to remain competitive in the market. Amazon uses sophisticated algorithms and machine learning to understand and implement dynamic pricing. It retrieves and explores vast volumes of customer data, and this helps Amazon modify the prices often multiple times in an hour.

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To offer products and services at competitive prices, Amazon uses the price anchoring strategy. This is a big influencing factor where a low-priced item is listed along with a similar item that is high-priced.

Customers are easily attracted toward the low-priced one provided there isn’t much of a difference in the product specifications.

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?Advanced algorithms give an insight into the demand, competitor’s price ranges and historical sales data. This?modifies prices to adjust to customer requirements and balance profits.

Factors influencing dynamic pricing

●?????Demand and supply conditions

The level of demand for a product and the scarcity or abundance of a product are significant factors influencing Amazon’s decision for dynamic pricing.

●?????Time of purchase

Prices are greatly influenced by the time/day of the week of purchase. For example, weekend eves are the most popular times for purchase. Also, seasonal influences like festivals facilitate dynamic pricing.

●?????Customer segmentation

Sensitiveness toward price fluctuations varies depending upon the segment to which a customer belongs. Analyzing this factor also enables the modification of prices.

●?????Competition

The prices of similar products offered by competitors influence dynamic pricing strategy. To keep up the market share, Amazon resorts to repricing frequently.

●?????Consumer behavior

Amazon’s algorithm captures every movement of the consumer.

For example, it knows how many times a customer views a particular product, what products are added to the wishlist. Based on this, it recommends similar low-priced products or makes the customer aware of a price drop in the products saved in the wishlist. This stimulates interest in the buyer.

Ensuring customer trust and balancing profitability

The below-listed points help us understand how Amazon balances customer trust and profitability:

●??????89% of customers trust Amazon and are likelier to buy here than any other eCommerce site.

●??????The consistent availability of trusted brands at favorable prices has increased the confidence of buyers.

●??????According to Statista, 82% of buyers state that price is a crucial aspect for buying on Amazon. This implies that with dynamic pricing, customers can access lower prices for their preferred products at Amazon.

●??????The low shipping cost, easy return facility, availability of top brands, etc., and dynamic pricing have contributed to increased trust in Amazon.

●??????Retaining customer loyalty, Amazon has been able to considerably accelerate its revenues with its pricing policy.

●??????Amazon’s annual revenue increased by about 9.4%, from the previous year to hit $513.983 billion in 2022.

●??????Prime membership is another factor Amazon has successfully employed to ensure trust and balance profitability. By offering exclusive discounts to prime members and providing additional services like OTT, it has pulled more customers and retained them.

●??????Amazon also targets important occasions to employ dynamic pricing, which has been a great supporting factor for maintaining profitability. For example, The Great Freedom sale, Amazon Black Friday Sale, Christmas sale, etc.

Conclusion

Amazon has a definite advantage as an eCommerce marketplace with abundant customer, sales and market data at its disposal. These are available in real-time as they employ machine learning and big data analysis. Amazon’s pricing policy is transparent, leaving no room for discrimination. Thus, in spite of differences in price, it has been able to earn the trust of the customers and maintain profitability.