What Is Dynamic Pricing and How Does It Affect E-Commerce

What is dynamic pricing?

Dynamic pricing is product pricing based on various external factors, including current market demand, the season, supply changes and price bounding. With dynamic pricing, product prices continuously adjust — sometimes in minutes — in response to real-time supply and demand. Amazon is one of the largest retailers that uses dynamic pricing and, undoubtedly, the way most consumers have been exposed to the practice; its algorithms continuously adjust and evaluate the prices online shoppers see on its website.

Dynamic pricing is a flexible strategy where prices continuously adapt to real-time supply and demand, enabling businesses to optimize revenue, improve competitiveness and enhance customer satisfaction. This approach allows retailers to maximize revenue during high-demand periods while offering competitive pricing during slower times.

Dynamic pricing in e-commerce

Dynamic pricing lends itself more to e-commerce than brick-and-mortar businesses because it is based on real-time trends and supply chain factors. Since in-store prices are more difficult to change, these businesses tend to set prices that last for longer periods. In contrast, online businesses can easily change their pricing. For example, if stock for a particular product drops on an e-commerce site like Amazon, you’ll likely see a surge in the price within minutes. Walmart is another example of a major company that uses dynamic pricing online to stay competitive.

Online retailers with ever-increasing competition face the challenge of maximizing profits while keeping their prices competitive. Dynamic pricing is the ideal solution to this problem; it considers supply-and-demand changes to recommend optimal prices. If implemented for a sustained period, this pricing strategy can significantly boost your overall revenue and profitability.

How dynamic pricing works

Dynamic pricing relies on sophisticated algorithms and artificial intelligence (AI) to analyze vast amounts of data and make real-time pricing decisions. These systems process multiple data sources simultaneously to determine optimal pricing strategies.​

Key data sources powering dynamic pricing include:​

• Consumer behavior patterns: Purchase history, browsing activity and engagement metrics
• Competitor pricing: Real-time monitoring of competitor prices across multiple channels
• Market demand and supply: Current inventory levels, stock availability and demand fluctuations
• External factors: Seasonality, weather conditions, special events and economic indicators

Machine learning algorithms use historical sales data, customer behavior and market trends to predict future demand and adjust prices accordingly. These algorithms can incorporate real-time data such as competitor pricing, inventory levels and customer traffic to make immediate pricing decisions. By analyzing how sensitive customers are to price changes (price elasticity), algorithms can optimize pricing to maximize revenue without losing sales.​

Dynamic pricing systems can integrate with inventory management and sales systems to ensure that pricing adjustments align with overall business goals. The longer a dynamic pricing solution runs and the more data it gathers and analyzes, the better quality its output becomes.

Types of dynamic pricing strategies

There are multiple dynamic pricing methods businesses can implement based on their specific needs and market conditions. Each strategy targets different factors that influence customer purchasing decisions.​

• Time-based pricing adjusts prices according to specific time periods (e.g., peak hours, seasons, holidays). This strategy capitalizes on predictable fluctuations in demand throughout different timeframes. Airlines increase prices during peak travel seasons, while restaurants may offer lower lunch prices during weekdays to attract customers during slower periods.
• Demand-based pricing sets prices in direct response to customer demand levels. When demand surges due to trends, seasonality, or unexpected events, prices increase to capture higher margins. When demand decreases, prices drop to stimulate sales and prevent excess inventory buildup. This model relies heavily on real-time sales data and behavioral signals.
• Geo-pricing varies prices based on geographic location, considering factors like local competition, cost of living, purchasing power and regional demand patterns. Companies may charge different prices for identical products or services depending on the customer’s location, reflecting local market conditions and economic factors that influence willingness to pay.
• Inventory-driven pricing adjusts prices based on current stock levels and inventory turnover rates. When inventory is high or products are approaching expiration dates, prices decrease to clear stock quickly. Conversely, when stock is low or fast-moving, prices may increase to maximize revenue from remaining units and manage demand until restocking occurs.
• Personalized pricing tailors prices to individual customers using personal data including browsing history, purchase behavior, demographics and past price sensitivity. This model determines each customer’s unique willingness to pay and presents customized pricing. Unlike other models that apply broadly, personalized pricing creates individual price points based on specific customer profiles and behavioral patterns.
• Peak dynamic pricing sets higher prices during a product’s peak seasons. For example, if you sell swimsuits or pool supplies, you can charge more for them during the summer. You can also charge more for popular gifts during the holiday season.

Advantages of dynamic pricing

If you’re selling online via an e-commerce store, it’s important to understand dynamic pricing and how it can benefit your business. Done correctly, this strategy can help you raise prices while keeping consumers happy. Below are some of the specific upsides of dynamic pricing.

Dynamic pricing gives you greater control over your pricing strategy.

A common argument against dynamic pricing is that it reduces your control over your products’ prices. In reality, it has the opposite effect. As a retailer using dynamic pricing, you’ll have access to real-time price trends across thousands of products in your industry and have the ability to make adjustments at will. You’re able to see your competitors’ pricing changes and understand a product’s supply-and-demand levels. This information will help you set the right prices for various products and maximize your revenue. 

“Dynamic pricing keeps you flexible to ever-changing market conditions, ensuring you always charge the right price at the right time,” Stephan Liozu, chief value officer at Zilliant, told us. “Once you know which events drive demand, you can build them into your pricing strategy and make the most of spikes.”

Dynamic pricing drives average order value and revenue growth.

When implemented correctly, dynamic pricing can help an e-commerce business increase conversions and revenue per order, improving its profit margins.

“Aligning prices with real-time demand or inventory levels can create demand for products. I’ve seen up to a 13 percent lift in average order value during peak sales periods,” said Windy Pierre, founder of eCommerce Manage.

Nabeel Siddiqi, founder and CEO of Moksha AI, the company behind Price Perfect, pointed out how dynamic pricing can help keep cash flowing even during times of disruption.

“For example, if the market demand for your product drops, dynamic pricing can reduce prices for a short period of time to keep your revenue and profits up. This can help stabilize and increase overall revenue,” he said.

Dynamic pricing maximizes competitiveness.

Dynamic pricing enables businesses to stay competitive by responding quickly to market changes and consumer trends. By monitoring competitor prices in real-time, retailers can adjust their pricing strategies accordingly, ensuring they remain competitive in a fast-paced market. This agility allows businesses to capture market share during critical periods and maintain relevance in competitive categories.​

Dynamic pricing enables personalization at scale.

AI-powered dynamic pricing systems can deliver personalized pricing based on individual customer profiles and purchasing history. This personalization can enhance customer loyalty and increase sales by offering tailored discounts or incentives that match specific customer needs. By creating a more engaging and relevant shopping experience, personalized pricing strengthens customer relationships and encourages repeat purchases.

Dynamic pricing helps manage your inventory more effectively.

While you may already use point-of-sale (POS) software or an inventory management system to track your inventory, dynamic pricing can help you manage stock levels more effectively, resulting in a greater return on investment.

“You can use dynamic pricing to aid with stock management and lower prices of lackluster SKUs [stock keeping units] to move stock out the door,” said Liozu. Pierre helps his clients optimize their inventory “by adjusting prices dynamically to clear items at the right time.” In one case, they “reduced overstock by 6 percent in one quarter.”

Furthermore, “dynamic pricing, when linked to inventory levels, can help handle the variations that inevitably arise in supply chain management,” Siddiqi said, explaining, “When stock for a product is low, dynamic pricing can slightly increase the price to slow the sales and keep enough inventory to not annoy customers.” He cautioned, however, that while “this can help smooth the inventory levels,” it’s an “advanced pricing strategy that may not work for all businesses.”

>> In the market for a point-of-sale solution for both in-store and e-commerce? Check out business.com’s recommendations for the best POS systems.

Disadvantages and risks of dynamic pricing

While your e-commerce business has a lot to gain by using a dynamic pricing strategy, there are some risks involved as well.

“There are several downsides to dynamic pricing when it’s applied irresponsibly. Businesses must be careful not to focus only on maximizing profit margins or offering the lowest possible price,” Liozu warned.

Consider these potential pitfalls before committing to dynamic pricing.

Dynamic pricing can lead to customer backlash and distrust.

While it’s tempting to sit back and leave the pricing to the algorithms, doing so can cause a customer revolt. For example, Bruce Springsteen allowed tickets for his 2023 tour to be handled by Ticketmaster’s dynamic pricing system, but The Boss’s blue-collar, advocate-of-the-average-guy brand was seriously tarnished when midrange seats went on sale for over $4,000 each because high demand sent prices soaring. 

Fluctuating pricing can also confuse, anger and turn off customers. “The biggest drawback to dynamic pricing is potential customer backlash and damage [to] brand value. When customers see prices changing without any justification or reason, then they can feel taken advantage of,” Siddiqi said.

To mitigate potential fallout, Siddiqi recommended following Price Perfect’s “PRICES” strategy.

• Purchase frequency: Adjust pricing less for frequent purchases and more for occasional buys.
• Range boundaries: Set appropriate price ranges that align with brand positioning and profitability.
• Inform transparently: Communicate clearly about why and how prices change, focusing on the benefits for customers.
• Conservative thresholds: Start changing prices slowly. “Changes under 5 percent consumers often don’t notice,” Siddiqi said.
• Explain value: Maintain price as a value indicator, especially for premium products.
• Strategic decreases: Use price reductions thoughtfully to expand your customer base.

Dynamic pricing faces regulatory scrutiny.

The Federal Trade Commission (FTC) has increased oversight of pricing practices, particularly algorithmic and data-driven pricing strategies. In 2024, the FTC launched an investigation into “surveillance pricing” practices, examining how companies use AI, consumer data and competitor data to set prices. The FTC also brought its first Robinson-Patman Act enforcement case in nearly 25 years, signaling renewed attention to price discrimination issues.​

As of May 12, 2025, the FTC’s Rule on Unfair or Deceptive Fees prohibits bait-and-switch pricing and requires businesses to disclose total prices upfront, including all mandatory charges, for live-event tickets and short-term lodging. State legislators have also introduced bills to regulate data-driven pricing practices, addressing concerns about unfair discrimination, transparency and the processing of personal data.​

Businesses employing dynamic pricing must ensure their strategies comply with legal regulations and ethical considerations. Companies should avoid pricing practices that could be considered anticompetitive, deceptive or discriminatory based on protected characteristics.

Dynamic pricing can be challenging to implement.

Manually monitoring hundreds of thousands of products and watching real-time supply-and-demand trends is highly difficult and beyond the scope of most e-commerce businesses. Fortunately, the best e-commerce platforms and dynamic pricing solutions take away the guesswork, automating the process to provide accurate data you can use to set optimal product prices. But even though automating the price-changing process generally saves time and effort, these tools have a significant learning curve for new users.

“Complex implementation requires a robust algorithm or software, which entails setup costs and ongoing tuning,” Pierre said. “Technical errors or misalignment with inventory data can wipe out margin gains if not implemented correctly.”

Siddiqi also highlighted the “complexity of implementation” considering all the variables involved in dynamic pricing.

“Ideally, dynamic pricing should be connected to inventory data, customer behavior data, competitor prices, etc., as inputs and [you should] be able to change prices in the e-commerce store automatically. However, all of this requires sophisticated systems, business processes and maintenance,” he said.

These challenges could make your team hesitant to embrace dynamic pricing, especially when there are simpler ways to set prices.

“Cost-plus pricing is straightforward. You know your cost; you know your margin — done,” Liozu said. “Value-based pricing and competitor-based pricing are complex and, although these strategies are very likely to reap long-term dividends, B2B [business-to-business] companies often feel unable to implement them due to a perceived lack of bandwidth or push-back from end-users.”

Liozu added, “For dynamic pricing strategies to succeed, it’s essential that all stakeholders understand and support the approach. Transparency in how prices are set and the benefits of dynamic pricing should be clearly communicated to sales teams and customers.”

Real-world examples of dynamic pricing in action

Dynamic pricing has been adopted across various industries, with several major companies demonstrating successful implementation strategies.​

• Amazon adjusts prices approximately 2.5 million times daily using sophisticated algorithms that analyze demand volume, stock levels, competitor pricing, product page visits and time of day.​
• Uber uses surge pricing to balance supply and demand for rides, automatically increasing fares when demand is high in specific areas to attract more drivers, with prices returning to normal once demand is met.​
• Airlines pioneered dynamic pricing strategies decades ago. They adjust ticket prices based on demand fluctuations during holidays and special events, time to departure, remaining seat availability and competitor pricing.​
• Airbnb implements a Smart Pricing feature that automatically adjusts rental prices based on season, demand, property features and location, with property owners able to set minimum rate constraints.​
• SaaS subscription models increasingly employ dynamic pricing through tiered subscription models, usage-based pricing, and AI-enhanced pricing strategies that analyze user behavior and market trends, with usage-based models charging customers based on consumption metrics like transactions or data storage.

How e-commerce businesses can use dynamic pricing effectively

Implementing dynamic pricing successfully requires careful planning, transparent communication and adherence to best practices. Businesses must balance revenue optimization with customer trust to achieve sustainable results.​

Transparency is essential.

Transparency about when and why prices change is necessary for companies to convince customers that dynamic pricing is mutually beneficial. Brands should communicate clearly about why and how prices change, focusing on the benefits for customers. Using simple statements on checkout pages, such as “We adjust prices based on demand and availability to keep our costs low and pass on savings,” along with clear FAQ sections about pricing can build trust.

Set appropriate pricing boundaries.

Businesses should establish minimum and maximum price limits to ensure profitability while maintaining customer trust. Conservative thresholds work best when starting. Range boundaries should align with brand positioning and profitability goals, protecting brand value while allowing flexibility. For luxury brands, setting floor prices protects brand equity while still enabling exclusive discounts for loyal customers.​

Choose the right dynamic pricing tools.

Several dynamic pricing software solutions cater to e-commerce businesses of different sizes and needs. Prisync is designed for e-commerce businesses of all sizes, offering competitor monitoring and automated repricing with plans supporting up to 100, 1,000, or 5,000 SKUs. Wiser Solutions provides enterprise-level capabilities for mid-market to large businesses managing more than 100,000 SKUs. Intelligems serves Shopify-specific needs, offering price testing, A/B testing, and profit optimization tools built exclusively for the Shopify platform.

When selecting dynamic pricing software, businesses should consider:​

• Monitoring frequency and competitor limits
• API response time for price updates
• Accuracy rates and data history capabilities
• Integration with existing inventory and sales systems
• Learning curve and implementation complexity

Start strategically and scale gradually.

Before implementing dynamic pricing, businesses should define clear goals – whether achieving specific sales volumes, maximizing profits or improving cash flow. Start with a small selection of products and expand gradually based on observed outcomes. Analyze competitors to determine if they’re already using dynamic pricing and which strategies they employ. Collaborate with sales teams to gather customer feedback on pricing, as their insights provide valuable guidance.​

Comply with legal and ethical standards.

Ensure dynamic pricing strategies adhere to legal regulations and ethical considerations. If committing to no surge pricing, implement proper monitoring systems to ensure compliance. Select dynamic pricing strategies that align with business objectives and customer needs while respecting brand values. Businesses must be aware of potential regulatory issues in their markets and ensure transparent practices.​

Monitor performance and adjust continuously.

Dynamic pricing requires ongoing monitoring and optimization. Use analytics to track performance metrics including conversion rates, average order values, customer satisfaction scores and profit margins. The longer a dynamic pricing solution runs, the more data it gathers and the better quality its output becomes. Regular A/B testing allows businesses to evaluate the effectiveness of different pricing strategies and continuously improve.

Quick comparison table: dynamic pricing models

Source interviews were conducted for a previous version of this article.