Personalized Dynamic Pricing with RFM Modeling

Dynamic pricing primitives from the airline and hotel industry have lately shifted to the wider electronic retail industry, however there is still a lack of ready to use frameworks for applying or testing dynamic pricing policies in online e-commerce stores. This has practically generated limitations in the way dynamic pricing can be applied in real-life. This paper introduces a new dynamic pricing model that uses an extended version of the RFM model to calculate a personal price for each product sold online. Moreover, our work introduces an open-source simulation framework that allows testing and validation or different dynamic pricing policies. According to our evaluation, the proposed methodology achieved 54.33% increase in net profits when compared with nine other merchants following a fixed pricing policy and 16.13% increase when compared with the derivative-following pricing strategy.