# Study of Market Dynamics for Optimal Pricing

By Thomas Bennett Financial expert at Priceva
Published on August 14, 2023
Every retailer, unless dealing in absolute exclusives, understands that when setting prices, it's crucial to know the pricing of competitors for similar products. Studying market dynamics has become a stark necessity for survival in the world of e-commerce.

This is because you can only control a situation when you understand its dynamics and can respond promptly to changes. Thus, having the right information aids in effective competition and the development of a calculated pricing strategy.

In this article, we'll discuss what optimal pricing is and how to monitor market dynamics in e-commerce to quickly adjust prices for your products.

## What is Market Dynamics?

Market dynamics refer to the process of change over time in terms of volume, structure, and level of sales, product turnover, profitability, and the number of trading enterprises.

Market dynamics influence:

● Pricing and behavior of producers and consumers in the economy,

● Price signals arising from changes in demand and supply,

● Consumer reaction to price changes whether increases or decreases,

● Producer and supplier response to changes in demand.

A fundamental concept of economics is the relationship between demand and supply. These are the most critical factors that support the economy and affect how pricing models arise and change due to these counteracting flows.

Since market dynamics constantly change, it is necessary to continually monitor the situation.

## Optimal Pricing

The optimal price is the price at which a unit of a product can be sold at maximum profit under given market conditions.

In other words, the optimal price is the price point at which the seller is happy to sell their product, and your customers are happy to buy it. But in a market economy, the optimal price isn't some fixed figure. It is constantly changing under the influence of many factors.

Price points are the prices at which demand for a product remains relatively high. The demand curve is not a linear function. Searching for an optimal price resembles a wave sequence rather than a straight line. The crests of the waves are the price points.

The diagram below shows the price points marked as A, B, and C. When a supplier increases the price above a certain price (say, to a price slightly above the price point B), the sales volume decreases not proportionally to the price increase. This decrease is slightly more than the additional income from the increased unit price. As a result, the total revenue decreases when the company raises its price above a certain price.

Technically, the price elasticity of demand is low (inelastic) below the price point (steep part of the demand curve) and high (elastic) at a price above the price point (slightly inclined part of the demand curve). Companies, in the pricing process, find optimal price points and set them as the price.
Price points A, B, and C, along the demand curve (where P is the price, and Q is the demand), are greatly influenced by market dynamics as they impact demand and supply in the economy.

The primary factors in searching for the optimal price are:

Perceived value. To determine the actual value of a product, it's essential to find the value perceived by your target audience. As e-commerce dynamics change rapidly, so do your customers' buying habits.

Your competitors' prices are another important factor. What are your competitors' prices? Do you remember the last time you checked this? You need to continually track your competitors' prices to understand their strategy. You may be losing a significant portion of your sales if you set prices for your products without considering your competitors' prices.

Now let's outline the steps to study market dynamics, which you need to know and use when pricing your products.

Customers drive the market. If demand is low, you won't be able to sell much of your product. To increase sales volume, you need to identify your consumer segment. Then understand their motivations during purchases and key choice factors.

What time of day and which days of the week do they prefer to shop in your store? Which products do they look at but then don't buy? Which products do they purchase in one receipt? Track their actions and observe if there are any changes in their purchasing behavior over time.

As the number of online purchases grows day by day, consumers are continually seeking the best opportunities.

To stay competitive, it's necessary to pay more attention to studying buying habits and strive to make purchases easier and more enjoyable.

## 2. Personalize your pricing strategy

It's no secret that customers will pay more for what they value. The secret is to figure out which customers value your products or services. That's when the pricing strategy works: find a price your customers are willing to pay, and you are satisfied with the profit you receive.

To develop a personalized pricing strategy, you can study your customers in detail. Everything you know about their needs, income, desires, and behavior. Then, using this information, you can suggest a price at which customers are likely to make a purchase.

Remember, an effective personalized pricing strategy offers more beneficial proposals to regular customers than to customers without a sales history.

## 3. Track your competitors' actions

Always keep an eye on the competition in your market. Determine whether it's strong or weak. You should always conduct market research and track your competitors' actions. Understanding the strategy behind their actions can give you a competitive edge.

## 4. Monitor your competitors' prices

You need information about your competitors' prices. It can help in developing your own pricing strategy. There are two main methods of competitor tracking.

Manual tracking: If you sell a small number of products, manual price monitoring can be effective. Suppose it takes you 30 seconds to visit your competitors' websites, look at their product prices, and record them in a spreadsheet. If you sell 50 items on your site and have 10 competitors, it'll take 4 hours.
However, considering that the assortment of online stores in the main mass is much more than 50 SKUs, you can imagine how much time will be spent on full-scale monitoring, and how quickly the data will become outdated, even before the end of the review of all sites.

Automated price monitoring: Another option is to work using programs or services that automatically scan competitor prices. This method is more effective for large product matrices because it significantly reduces the time to collect information and guarantees verified and up-to-date data, which can underpin the pricing of a commercial company.

## 5. Offer high-quality products and services

The product or service you offer is one of the main factors affecting market dynamics. It's important how good your product or the quality of your service is. This is because you could lose many of your customers due to poor quality products. The products you offer affect your brand's image, and this could be your path to success if you do everything right.

Your goal should be to create value by meeting the needs of your customers. Find their pain point and offer your product or service as a solution.

## 6. Develop a pricing strategy in the context of global financial uncertainty

The economic situation in the market is crucial. You won't be able to sell your product if customers don't find your prices reasonable. Today, everyone in the world, from wholesalers to end online buyers, is dealing with inflation. As an online seller, you need to be able to quickly navigate the situation and promptly adjust prices to it.

To effectively combat inflation, you need to develop a pricing strategy. How to do it? Implement flexible pricing strategies.

Watch for changes in your competitors' prices and take necessary counteractions if necessary. If you have a lot of competitors in your niche, you might consider using a dynamic pricing system. Having competitive analytics can help you find missed profits and give you more chances to smartly outperform your competitors!

Dynamic pricing is not just a downward game. Don't be afraid to raise prices. But keep in mind that customers are willing to pay a higher price only if they are told compelling reasons for it. Explain why you are raising prices. For example: you are doing this due to the increase in the cost of materials and do not want to sacrifice product quality by switching to cheaper substitutes.

Don't blame inflation for price increases. Instead, tell customers about the benefits of your product, which will increase the value of your product in the eyes of consumers. Most importantly, don't apologize for high prices. Be polite and provide reasoned descriptions of the reasons for the increase.

## Conclusions

● Market dynamics are constantly changing. You need to continually adjust the pricing structure and test prices to find the optimal option.

● Your target audience has a huge influence when searching for the optimal price for your products. Study your customers' buying habits in more detail and test prices to find those that they may find attractive or acceptable.

● Continuously monitor the market situation. Track competitor prices and use this information when determining prices for your products.

● In conditions of financial uncertainty, use pricing strategies that can work during this period.