What is Transaction-Based Pricing?

Transaction-based pricing, also known as transactional pricing, is a strategy where prices are determined on a per-transaction basis. Rather than having a set price for all customers, the price is set dynamically to reflect the unique and variable aspects of each sale.

Several different factors can influence the pricing:

Order size
Input costs
Customer type
Time of purchase
Competitor prices
Supply and demand

Even the customer’s relationship to the brand can impact the final price.

You’ll see this type of pricing model in industries where products and services have a high degree of customization or personalization, like B2B manufacturing and enterprise SaaS. It’s also common in sectors with a high degree of volatility, like travel, hospitality, and certain retail sectors.

Synonyms

Transaction-based pricing model
Transactional pricing
Deal-specific pricing
Custom pricing

Core Elements of Transactional Pricing

If demand is variable, there’s an inherently high level of customization needed to fulfill an order, or the cost of production for each order changes quickly, creating a fixed price is incredibly difficult. Transactional pricing adapts to each sale, unlike fixed pricing, which uses the same rate for all transactions.

Let’s take a look at the core elements of the transactional pricing model:

Customer-specific pricing

Customer-specific pricing (also called personalized pricing) is a strategy where businesses tailor prices for individual customers based on unique attributes like purchase history, relationship status, or negotiation power.

Deal-specific pricing common in the B2B space, especially at the enterprise level. Here, a business relationship is ongoing, and special considerations can be made to incentivize loyalty or adjust for changing market conditions. For example, the customer with the highest order volume and frequency might receive discounted pricing.

You might also broaden your approach to streamline the application of more commonly used sales strategies. Companies do this by segmenting their customer base based on certain attributes, then creating a targeted pricing strategy for each group. For instance, every new customer may be entitled to an introductory rate to sweeten the deal.

Value perception

Since charges happen on a per-transaction basis, the perceived value of what is being sold plays a significant role in the final price.

Urgency
Business use case
Problem the product solves
Monetary value of that problem
Delivery timeline (e.g., standard vs. expedited)
Comparison with current competing offers in the market

These are all factors that come together to influence the price your customer pays. The point is to understand how your customer sees the value of your product and align your pricing accordingly.

For example, faster delivery, higher degrees of responsiveness or personalization, and increases/decreases in general market prices will control some aspects of how you position the cost of your product or service (and how much they’re willing to pay for it).

Dynamic adjustments

With transaction pricing, prices are adjusted in real-time or periodically to reflect the perceived value to each customer or customer segment.

Depending on how you apply transaction-based pricing, this could mean:

Lower prices for bulk purchases
Price surges during times of peak demand
Higher or lower prices when input costs change frequently
Personalized offers based on customer loyalty, referrals or rewards programs

In the travel industry and certain ecommerce sectors, dynamic pricing means changing prices multiple times a day or week through the use of artificial intelligence and algorithms that track consumer behavior. In manufacturing, it could mean calculating a higher or lower total price if input costs change.

Negotiation-based pricing

When you enter into a special pricing agreement, you’ll want to negotiate terms that are favorable to both your customer and the business. This is more common in complex sales environments where buyers and sellers collaborate on deals. In industries like airlines and ecommerce, transaction costs are usually company-driven.

To arrive at transaction-based charges, you’ll need to consider:

The buyer’s volume commitment or historic purchase volume
Standard agreement terms (e.g., payment terms, delivery schedules)
Duration of the agreement (especially important in the subscription model, where payments are recurring)

The buyer will have their own objectives and criteria as well. As a part of the negotiation, you’ll need to justify the price by proving the benefits your product or service offers and how it adds tangible value to their business.

Cost-to-serve considerations

When you set a custom price or dynamically adjust it to reflect current dynamics, you always have to consider profitability. If your pricing dips below your ideal margins some of the time, you don’t have an effective transaction-based pricing strategy.

Your cost-to-serve represents the cost of actually delivering a product or service to the end user. these will be industry-specific.

In the manufacturing industry it’s raw materials and production costs.
In the service industry it’s labor costs and overhead expenses.
In the SaaS industry, it’s maintenance and development.

By understanding your cost-to-serve and aligning it with your target profit margins, you can determine the minimum price needed to maintain profitability. This should be your starting point for transaction-based pricing — it dictates how much you can offer discounts or make concessions.

Segmentation and personalization

Most companies create offers that match the needs of different customer segments using tiered pricing.

For example:

SaaS products have basic, pro, and enterprise tiers based on how advanced the features are.
Service-based businesses offer multiple pricing packages based on the level of service provided.
Airlines sell economy, business, and first-class tickets to attract everyday and luxury travelers.

Segmentation and personalization are crucial in transaction-based pricing because they allow you to tailor your prices to match the value different customer segments want to get from your product. They also help you maximize your total addressable market and overall profitability.

Data-driven insights

To inform your pricing decisions, you’ll use historical sales data, behavior analytics, and competitive market analysis. Data helps you find patterns in customer behaviors, assess your performance, and forecast future demand, all of which give you the ability to optimize prices going forward.

Incentives and discounts

There are plenty of ways to incorporate conditional offers into your transactional pricing strategy:

Loyalty programs
Volume discounts
Time-sensitive offers
Discretionary discounting
First-time customer promotions
Upselling and cross-selling incentives

While these offers don’t directly determine your transactional price, they can significantly impact the overall value proposition for customers. They also maximize the deal size, boost customer retention, and create a sense of urgency that can lead to more conversions.

Compliance with policies

When it comes to variable pricing strategies like the transaction model, you have to consider compliance with internal policies and regulatory compliance.

Internally, you’ll set policies that protect your margins. That means determining the acceptable range of discounts, rules around negotiating price changes and exceptions, approval processes for deals outside standard guidelines, and minimum margins for custom deals.

Pricing teams also have to consider antitrust laws. There are laws that prevent price fixing and price discrimination, like the Robinson-Patman Act and Sherman Antitrust Act. You have to avoid artificially inflating prices, deliberately undercutting competitors to push them out of the market, or using discriminatory pricing practices.

Integration with technology

If you’re going to implement transaction-based pricing, there are a few important systems to integrate with your pricing strategy.

Configure, price, quote (CPQ) software is the most important. It’s the tool you use to configure products and deliver quotes to customers, so it’s the main interface for the sales transaction itself.

CPQ’s rules engine automatically enforces your pricing rules and ensures that sales reps stay within margins. For anything over a certain threshold (e.g., $ amount, discount threshold), you can create an approval workflow so the appropriate person reviews and approves the deal before it’s finalized. And custom pricing features enable reps to personalize offers with these guardrails.

Plus, it makes upselling simple. It automatically suggests related or complementary products you could bundle with what’s already being considered.

Contract management software and digital sales rooms are two other essential components. Contract management software is the system that enables you to draft, redline, sign, and, eventually, renew a contract. Digital sales rooms (like DealRoom) facilitate back-and-forth negotiation.

Price optimization software and dynamic pricing engines are also sometimes a necessity. These tools use algorithms and data to set the optimal price in real time, taking into account factors such as customer willingness to pay, competitive environment, and market trends.

Feedback loops

Within your tools, you should continually gather insights from transactions. This feedback will help you improve your pricing strategies and processes, create better deals in the future, and identify potential issues before they become a larger problem.

Benefits of Transactional Pricing

For the right type of company, transactional pricing offers significant benefits:

Revenue optimization

By tailoring prices to each transaction, you can maximize the amount of revenue you generate from each.

During periods of high demand, you can capitalize on the willingness of customers to pay more.
In periods of slow business, you can offer discounts or promotions to attract buyers who otherwise wouldn’t have purchased anything.
When input costs go up, you can pass some of those costs onto your customers.
For loyal customers, you can encourage more frequent or higher-volume purchases by offering price breaks.

These are just a few examples of ways transactional pricing can help you optimize your revenue.

Better understanding of customer behavior

As you collect data on transactions, you will gain a deeper understanding of your customers’ buying behavior. This information can help you refine your pricing strategies and target specific customer segments with personalized offers.

Enhanced customer relationships

If you standardize transaction charges, there’s no incentive for customers to prefer you over another vendor. After all, you aren’t doing anything special for them. In industries where customer relationships matter, it’s often more profitable to preserve and strengthen the relationship through customer-specific deals than it is to take a uniform approach.

Flexibility in dynamic market conditions

Dynamic pricing strategies make your business more agile in front of changing market conditions. By being able to quickly adjust prices based on demand and competition, you can respond more quickly to unexpected changes, such as supply chain disruptions or shifts in customer preferences.

Higher profit margins

Aligning your prices with your product value and cost-to-serve can help you increase your profit margins. And customers will understand and accept the prices if they feel like they’re getting a fair deal. Transactional pricing allows you to achieve this balance while making a deal that’s mutually beneficial for the customer.

Challenges of Transaction-Based Pricing

Implementation complexity

The most complicated aspect of transaction-based pricing is the implementation. Since there’s no out-of-the-box way to deal with customer-specific sales or customer negotiations, it’s going to take some time to develop your negotiation framework and create a repeatable sales process.

Risks of customer dissatisfaction

With transaction-based pricing, one customer might feel like they’re not getting a fair deal compared to another. If they think your pricing is discriminatory or misleading, you could face backlash and an uptick in churn.

Legal and ethical concerns

In some industries, offering different prices to different customers can raise legal and ethical concerns. It’s important to consult with legal experts and verify your pricing strategies comply with all applicable laws and regulations.

Reliance on accurate data

For effective decision-making, you need to have high-quality data that reflects your costs, product value, and market conditions. Without accurate data, it’s effectively impossible to set prices that simultaneously reflect customer value perception, desired margins, and current market dynamics.

Technological Requirements for Transaction-Based Pricing

The solution to all these potential issues is quite simple. Software can take care of the complexity and risks, minimize any unethical behaviors, and help you consolidate all your data sources into one central hub. In a lot of ways, it enables the entire pricing model.

We’ve already touched on a few of the systems needed to support transaction-based pricing, but here’s a complete list:

CPQ: The primary sales interface that both facilitates the quoting process and enforces your guardrails for profits, discounts, and pricing overall.
ERP: Used to consolidate financial data and store relevant information (e.g., orders, payments) that is used to report on how transaction-based pricing affects profitability. To effectively share product and pricing info, ERP must integrate with your CPQ system.
CRM: You need to keep a record of customer interactions, transactions, and history. Integrating CRM with your CPQ helps you stay on top of every deal in your pipeline and keep a detailed record of each customer account.
Data analytics platforms: All your software will have analytics built in. If you’re a larger company, that won’t be enough. More advanced data analytics platforms can help you find patterns, make predictions, and run simulations to pinpoint the best approach for each customer or segment.
Dynamic pricing engine: These AI-powered programs process large amounts of data and make pricing recommendations or decisions in real time.

The most valuable part of these solutions is that they automate the most complex aspects of transaction-based pricing. Your team won’t have to make manual calculations, scan reports, or sift through mountains of data. They can focus on the high-level strategic decisions.

Future of Transaction-Based Pricing

As the modern customer demands an increasing about of personalization, the need for transaction-based pricing solutions is only going to grow. As it does, there will be a huge growth in the software that supports it.

Emerging technologies will continue to innovate the pricing landscape.

AI is perhaps the biggest disruptor, and it’s advancing at a rapid pace. Already, AI-driven dynamic pricing models can adjust prices instantaneously. But you also have to look at IoT and blockchain technology when you examine the future of transaction-based models.

Internet of Things (IoT) devices collect real-time data on product usage, allowing companies to implement usage-based pricing models. For example, in the automotive industry, IoT devices in connected cars provide data on vehicle usage and driving behavior, enabling insurance companies to offer personalized, usage-based insurance premiums.

Blockchain technology ensures transparency and security in transactions, fostering trust between businesses and customers. By providing an immutable ledger of transactions, blockchain can support transparent pricing mechanisms and reduce disputes over charges. And adoption for this is expanding quickly — 81% of the world’s top 100 companies are already using it.

Customers will demand more and more personalization.

Modern consumers demand greater transparency in pricing and personalized experiences. 74% of buyers feel frustrated when content is irrelevant to them, and this expectation extends to pricing. They want to see prices tailored to their purchasing behavior and preferences.

Companies using AI and data analytics can meet these expectations by offering personalized pricing. As software continues to enable this, customers will increasingly choose the vendors that deliver those experiences.

The subscription-based model will continue to grow in popularity.

Industries are increasingly adopting subscription and usage-based pricing models to align with customer preferences and usage patterns. The software industry, for example, has completely shifted in this direction.

This transition to the subscription economy is facilitated by emerging technologies that allow for precise tracking of product usage, enabling fair and customized pricing structures.

Companies will have to balance profit with customer satisfaction.

While personalized pricing can increase revenue by targeting high-value customers, it can also alienate customers who feel unfairly priced.

To address this, companies must establish clear communication about how prices are determined and ensure that pricing strategies do not exploit consumer data unethically. Regulatory bodies, such as the Federal Trade Commission (FTC), are scrutinizing practices like “surveillance pricing,” where AI algorithms set prices based on individual consumer data in order to protect consumer interests.

Transaction-Based Pricing