Should Cost be part of a Dynamic Pricing Model?

In some situations it makes sense to include costs in dynamic pricing models. In others, it does not. Value-based pricing is generally superior.

It can be. But, as with most things in business, it depends. In this example below from an e-commerce company, cost makes up the starting point.


In this specific case, the company buys hundreds of thousands of products from various suppliers and then resell them on their website. And those purchase costs change daily or weekly, depending on the category. With a dynamic pricing model in place, they can adjust prices every day, even every minute or hour, while taking into account not only costs and margin expectations but also some more value-based factors (here simply labelled factor 1, 2 and 3) reflecting what they know their customers are willing to pay for various categories and individual SKUs. In other words, the dynamic pricing model both allows for value-based pricing while ensuring that due to the fluctuating nature of their costs that they don't sell below costs. In situations where their price is well above the costs, the model thus ensures a value-based approach. In situations where their price is close to or potentially below costs, the model ensures that such prices don't get published to the website. 

In other situations and industries where costs don't change so frequently, it is more advisable to focus 100% on value-based pricing, as this approach yields higher prices overall and over time: if the willingness-to-pay is high, and there is no risk that fluctuating costs will remove all profits, then go for value-based.


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