Dynamic pricing is a tactic where sellers adjust prices to reflect market conditions in real time.
When competitor prices change or when supply or demand shifts, the business reacts. When supplies expand, prices decrease. An item that brings more value sells for a higher price.
Prices Communicate
Imagine a direct-to-consumer brand that sells two water bottles. The first has a charcoal filter system and the second has a “spill-free” lid.
Bottles cost the same to produce. Since both are essentially decorative water containers, the brand sells them for the same price — $59.99 — and makes about $25 per sale.
Still, the filter bottle outsells the “undiluted” bottle 20 to 1.
Water bottles cost the same to produce, but they bring a different value to shoppers.
A bottle with a filter system has a different use than a bottle with a “spill-proof” cap. Hikers and campers get a filter bottle for safe drinking water – so they can submerge the bottle in steam and drink without fear of ingesting microbes or chemicals.
In contrast, the “spill-free” cap market is almost certainly larger than that of filter bottles, but also provides relatively less value. A customer does not have to pay a $20 premium to avoid spilling water.
So the price of a “spill-free” bottle doesn’t match the market. Sales jump if the brand lowers its price to $39.99 and makes $5 per item. Suddenly, “spill-free” water bottles outsell filter bottles by 50:1.
Prices should reflect the value of the item, not the cost of production.
Dynamic pricing
Market prices have inherent advantages. Let’s consider a few.
More came back. Our imaginary DTC brand increased sales of “undifferentiated” bottles when they lowered their prices. Similar scenarios are widespread in practice.
The price of an item is essentially an agreement between buyer and seller, a mutually beneficial exchange of value. Sellers are looking for more profit and buyers are looking to save money. The price is where the parties agree.
But buyers differ. For example, at $59.99, maybe one shopper in 100 will buy a “spill-free” water bottle. But at $49.99, it’s 20. In the end, at $39.99, 60 shoppers buy.
So lowering the price from $59.99 to $39.99 increases the revenue per 100 visitors from $59.99 for one sale to $2,399.40 for 60.
More profit. Dynamic pricing improves the bottom line.
Recall that at $59.99, water bottle maker DTC made a profit of $25 per sale. As the price moves down, so does the profit per unit. So at the $49.99 and $39.99 price points, the brand makes the same profit: $300.
A good dynamic pricing strategy moves the price to maximize overall profits.
Adaptability. Real-time dynamic pricing can move prices by pennies or dollars in response to fluctuations in demand, competition, and even seasonality.
The ideal price for a water bottle might be $39.99 on a winter day and $55.99 in August.
Product development. Dynamic pricing reveals consumer preferences and needs. Data can refine marketing strategies, customer experiences and product development.
Powered by AI
Dynamic pricing has been around for decades, but AI is making it easier. A merchant in 2025 using a modern e-commerce platform will have several AI-powered real-time pricing solutions to choose from.
Once implemented, dynamic pricing helps sellers and buyers.