Ryan Lee is the CEO of multivendor marketplace platform Nautical Commerce. Views are the author's own.
The e-commerce industry has grown exponentially over the last few years, driven in large part by the transition to the marketplace business model. The top players in the business-to-consumer (B2C) market — Amazon, eBay, Etsy, etc. — have demonstrated just how effective marketplaces can be at reaching new customers.
Despite being resistant to the marketplace model for many years, many business-to-business (B2B) companies have realized the advantages of evolving from an online storefront for only their own products to a niche marketplace of multiple sellers that provide buyers related products choices and that generates incremental revenue. More B2B companies are now eager to cash in on this expansion in e-commerce, with dozens of new and established companies launching their own marketplace platforms.
What’s changed to make this possible is that the technology for marketplace platforms, which are essentially sites on which multiple vendors conduct transactions, has become far more sophisticated, allowing for greater flexibility to support the complex nature of B2B transactions. The number of marketplace platform providers that offer custom-built or on-demand marketplaces for their clients, such as Nautical Commerce, has also expanded, making the transition far more cost-effective and less time-consuming.
By 2028, it’s estimated that the global B2B e-commerce market size will reach $25.65 trillion, according to a December 2021 report from ResearchandMarkets.com. Such rapid expansion presents innumerable opportunities for companies seeking to expand their business in their respective industry verticals.
However, one major challenge for companies that are adopting the marketplace model for the first time is dynamic pricing. In particular, there is complexity associated with creating a dynamic pricing system that can respond to changes in the marketplace and adjust prices accordingly.
Understanding dynamic pricing
Anyone who’s ever bought an airline ticket knows that the price of the ticket can change over time, based on several factors, such as how close the departure date is, where the customer has purchased the ticket, even who the customer is and why they’re traveling.
This is essentially what dynamic pricing is: prices go up or down depending on supply, demand, timing, and other variables. E-commerce giants like Amazon were among the first online retailers to adopt and perfect this approach.
The reason that dynamic pricing is so effective — and doesn’t result in pushback from customers — lies in its transparency. Customers have grown accustomed to the idea that prices fluctuate based on when and how they buy. Other industries that use dynamic pricing include hospitality, entertainment, public utilities, even public transportation. Dynamic pricing has pretty much become a fact of life.
Still, many B2B suppliers that are still hesitant about adopting the marketplace model fear that placing their products alongside competitors will make it difficult to compete on price. However, by using a dynamic pricing strategy, companies can ensure that their products remain competitive by adjusting prices based on sales trends and other factors. Companies also gain access to a far larger pool of potential buyers than they had previously.
Picking a strategy
In e-commerce, dynamic pricing is controlled through software using a pricing engine – such as Compterra, Omnia, or Qualtrics CoreXM – that changes prices in real time based on the inputs it receives. While there are numerous ways to determine what these inputs are, the three most common approaches are:
- Cost-Plus Pricing – Prices vary based on the cost of manufacturing the product, plus a predetermined profit margin.
- Competitor-Based Pricing – Prices change based on competitor pricing, either to match or undercut the competition.
- Value-Based Pricing – Prices vary based on customers’ willingness to pay.
There are pros and cons to each approach. Depending on a company’s business model, one may be more appropriate than another.
Determining the right inputs for a pricing engine will take a bit of work. Users have to decide which factors matter the most in making pricing decisions, such as cost of goods, inventory levels, competitor pricing, and seasonal demand.
Getting dynamic pricing right will require an in-depth discussion among all key departments in a business, including marketing, sales, finance, supply chain, manufacturing, etc. All this input makes it easier to accurately determine what factors will influence a dynamic pricing strategy.
There may be some trial and error as users work out the best approach. However, once the right inputs are determined, the pricing engine algorithm can be easily updated to fit new realities and a changing market.
Meeting customers where they are
There are a host of advantages to choosing a dynamic pricing strategy. It can significantly boost profits with every transaction. Dynamic pricing can also be especially helpful when testing new products and determining how much customers are willing to pay. It also simplifies inventory management, allowing companies to lower prices on slow-selling stock while raising prices on products that are flying off the shelf.
Over time, the data gathered will make it easier for a company to fine-tune its dynamic pricing strategy based on customer buying habits. Current advances in machine learning (ML) algorithms mean that once parameters have been set, the system can be left to operate without intervention. Then, as it gathers more data, the system will learn more about how to respond to market conditions on its own. That’s the beauty of Artificial Intelligence (AI).
The combination of the B2B marketplace model and dynamic pricing is anticipated to drive long-term business growth. In the coming years, expect to see more B2B companies embrace both the marketplace model and the use of dynamic pricing. Suppliers looking to increase sales and attract new customers will find that going beyond their own branded e-commerce websites and joining up with a marketplace is exactly what they need to bring them to where the customers are.