The Impact of Dynamic Pricing on Consumer Loyalty in Online Retail

Abstract

Dynamic pricing is the adaptation of changes in a product price on-demand and in real time according to the market demand, actions of competitors and buyer behavior. This has proved to be a key strategy in online shopping. Although such pricing mechanism can maximize the revenue part of the revenue equation and minimize inventory related expenses, its impact on consumer loyalty has not been well researched. This study examines the basic correlation between dynamic pricing and consumer loyalty, in e-commerce based on both the behavioral and the attitudinal aspect of customer retention.

The research is based on a mixed methodology; i.e., the traditional method of analyzing a transaction data on various online retail outlets complemented by qualitative interpretation of the information gathered during structured consumer interviews. The most important variables to be assessed will be price change frequencies and magnitudes, fairness of pricing, purchase satisfaction, and indicators of loyalty, i.e., repeated purchases and brand advocacy. Sophisticated statistical methods, such as regression and correlation value, serve to measure the effect of dynamic charging trends on consumer patterns.

Results also show evidence on a complex dependence: moderate and transparent prices should be adjusted positively impacting consumer involvement through the lens of perceived value and well-timed offers, but frequent or erratic changes led to potential distrust trading off to both expressed and implied outcomes of lower consumer loyalty and adverse word-of-mouth. In addition, prior experience in digital commerce, brand perception and price sensitivity has been observed to be important moderating variables to the response of consumers to dynamic pricing strategies.

The study suggests that consumers should embrace the idea of strategic use of dynamic pricing policies which strike the right balance between profitability and customer confidence. The recommendation in response to the negative effects that real-time pricing tools may have on the loyalty space is to complement the adoption of such tools with effective communication strategies and loyalty-strengthening actions, including individually personalized discounts, reward solutions, and clear pricing policies.

This paper is relevant to the e-commerce strategy research base because it adds empirical evidence to the relationship that exists between pricing flexibility and customer retention, which could be helpful to online retailers who are interested in maximising revenues without sacrificing long-term customer relationships.