Variable Pricing

When it comes to pricing strategy, there’s no one-size-fits-all solution. Most businesses need to experiment with a variety of complex pricing models to find the one that best suits their products, services, and goals. One pricing strategy that can be particularly effective is variable pricing. Though it may seem complicated, variable pricing can actually be quite simple to implement.

What Is Variable Pricing?

Variable pricing is a business model where the price of a product or service fluctuates based on demand. This type of pricing is common in industries with a limited supply of goods or services, such as the airline and hotel industries. Newer transportation and hospitality companies like Airbnb and Uber have also adopted variable pricing.

With variable pricing, businesses can charge more for their products or services when demand is high and less when demand is low. This allows businesses to maximize profits while still providing good value to their customers. It also allows them to offer the correct amount of their goods and services at varying levels of supply.

This can be a risky strategy, as it can alienate customers if prices are perceived as being too high. But when used correctly, it can be an effective way to maximize profits while still providing value to customers.

Synonyms

• Demand-based pricing
• Dynamic pricing
• Flexible pricing
• Personalized pricing
• Real-time pricing
• Surge pricing
• Yield management pricing

The Science and Economics Behind Variable Pricing

Variable pricing is rooted in several economic and behavioral principles:

• Price Elasticity of Demand: Measures how sensitive customer demand is to changes in price. Highly elastic products, like luxury items, see sharp drops in demand if prices rise, while inelastic products, like essential medications, maintain steadier demand.
• Supply Constraints: When supply is limited (e.g., concert tickets, airline seats), prices can be adjusted upward to balance demand. Conversely, oversupply may lead to price reductions to clear inventory.
• Peak vs. Off-Peak Cycles: Many industries charge more during high-demand times and less during slower periods. Think of ride-hailing surcharges during rush hour or lower hotel rates during the off-season.
• Behavioral Economics: Customers often perceive price changes differently based on framing, anchoring, and urgency. For example, a “limited-time” discount may feel like a gain, while a surge price might feel like a penalty.

Variable Pricing Models

There are several models that businesses can use to implement variable pricing.

Bundling: Businesses sell multiple products or services together at a discounted price. For example, many restaurants offer combo meals that include a drink, side, and a main dish for one price. And many retailers offer discounts on items when they’re purchased in bulk.

Dynamic Pricing: Businesses charge different prices for their products or services based on real-time changes in demand. This type of pricing is common in the airline, hotel, and rental car industries. When using this pricing model, businesses adjust their prices minute by minute, hour by hour, or day by day based on demand spikes.

Penetration Pricing: Businesses charge a low price for their products or services to attract customers and gain market share. Once the business has a large enough customer base, it raises its prices.

Skimming Pricing: Consumers pay a high price for their products or services when they first launch. As demand decreases and competition increases, businesses lower their prices. For example, when Apple launches a new iPhone, it charges a high price for the device. As demand decreases and other companies release similar products, Apple lowers the price of its iPhone.

Customized Pricing: This type of pricing is becoming more common as companies move to a subscription-based business model. For example, Salesforce.com charges different prices for its CRM software based on the features that each customer needs. And for enterprises with varying needs, this pricing depends on exactly what elements of the Salesforce ecosystem need to be implemented.

Pay-What-You-Want: Businesses allow customers to pay whatever price they want for a product or service. This type of pricing is uncommon, but it has been used by some businesses, such as the Humble Bundle, a collection of digital video games that customers can pay whatever price they want for.

Dynamic Pricing vs. Variable Pricing: What’s the Difference?

While the terms dynamic pricing and variable pricing are often used interchangeably, they have distinct nuances that are important to understand.

Variable pricing is a broad strategy where prices change based on factors such as customer segment, purchase volume, geography, or time period. It includes any pricing model that adjusts prices from a fixed amount to better match market conditions or customer characteristics. For example, offering discounted rates to loyal customers or charging different prices in different regions falls under variable pricing.

Dynamic pricing, on the other hand, is a specific type of variable pricing focused primarily on real-time price adjustments driven by immediate supply and demand fluctuations. Standard in industries like airlines, hospitality, and ride-sharing, dynamic pricing leverages algorithms and data analytics to continuously update prices as conditions change, such as increasing ride fares during peak hours or lowering hotel rates when occupancy is low.

Advantages of Variable Pricing

A few key advantages of variable pricing include the following:

• When businesses increase the price in times of high demand, they can earn more revenue while limiting the number of customers they serve. This allows businesses to maintain a high level of quality and service.
• For complex products, variable pricing allows businesses to charge different prices based on the features each customer needs. This allows businesses to better match their prices to the customer’s perceived value.
• Variable pricing can help businesses increase sales of slow-moving items by bundling them with other products or services.

Disadvantages of Variable Pricing

There are a few potential disadvantages of variable pricing to consider as well:

• Many customers may feel that dynamic pricing is unfair, especially if they purchase a product or service only to find out that the price has dropped soon after. This can result in low levels of customer satisfaction.
• Variable pricing can be complex to implement, and businesses need to have revenue optimization systems in place to track changes in demand and prices.
• If businesses use dynamic pricing to increase prices during high levels of demand, they may alienate their customers and damage their reputations.

Data Foundations and Technology Enablers of Variable Pricing

Modern variable pricing strategies are only as strong as the data and technology that power them. Businesses today can’t rely on intuition alone; success requires real-time insights, predictive capabilities, and integrated systems that keep prices consistent across every sales channel.

Data Analytics

The foundation of variable pricing lies in understanding historical and current market data. Businesses analyze past sales performance, competitor pricing, seasonal demand patterns, and customer purchasing behaviors to identify trends and set pricing rules. This analysis helps determine not only the right price points but also the timing of adjustments to capture maximum value. Combining structured data (such as transaction histories) with unstructured data (such as customer reviews or social media sentiment) gives companies a more holistic view of demand drivers.

AI and Machine Learning

Artificial intelligence and machine learning bring speed, accuracy, and scalability to variable pricing. These technologies process vast datasets in real time, spotting patterns humans might overlook. They can forecast demand shifts, predict how customers will respond to different prices, and even recommend optimal price points without human bias. Over time, machine learning models improve with more data, allowing pricing strategies to become increasingly precise and adaptive.

Real-Time Demand Forecasting

Variable pricing thrives on the ability to respond instantly to changing market conditions. Real-time demand forecasting uses live data feeds, such as search trends, booking activity, weather patterns, and supply chain status, to anticipate spikes or dips in demand. This allows businesses to adjust pricing dynamically, ensuring they capture opportunities during peak demand and remain competitive during slow periods.

Pricing Platforms and CPQ Integration

Pricing platforms are essential for operationalizing variable pricing at scale. These systems integrate with CRM, ERP, eCommerce platforms, and Configure Price Quote (CPQ) software to ensure pricing updates are consistent across every touchpoint, from sales reps generating quotes to automated online checkout processes.

CPQ solutions, in particular, enable sales teams to deliver accurate, customized quotes in seconds, automatically reflecting real-time price changes and promotional offers. This seamless integration reduces errors, speeds up deal cycles, and ensures customers receive a consistent experience no matter how or where they engage with your business.

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