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.
- Price Smoothing: When businesses charge a consistent price for their products or services, but the price is adjusted periodically to reflect the level of market demand.
- Price Lining: When businesses offer a limited number of price points for their products or services. This type of pricing is common in the retail industry.
Variable Pricing Models
There are a few different 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.
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.
People Also Ask
Is variable and dynamic pricing the same?
Variable pricing and dynamic pricing are not the same thing, though they are often confused. Variable pricing is when the price of a good or service fluctuates based on market demand. For example, gas prices go up when there is high demand and drops when demand is low.
Dynamic pricing, on the other hand, is when the price of a good or service changes in real-time based on current market conditions and customer data. An Uber driver, for instance, may charge more during rush hour than they would at 3 AM.
In both cases, prices are affected by market conditions, but dynamic pricing is much more immediate and can change hourly, or even by the minute. As a result, dynamic pricing is generally seen as being more advantageous for businesses than variable pricing.
What is an example of variable pricing?
The most common examples of variable pricing are in the travel and hospitality industries. Hotels, for instance, will often charge more during busy times, like holidays and conventions. And airlines will charge more for tickets during peak travel times (e.g., Christmas).
Why is variable pricing important?
Variable pricing is important because it allows businesses to accurately reflect their pricing to meet different levels of demand. When there is high demand for a product or service, businesses can charge more, and when there is low demand, they can lower prices. This type of pricing helps businesses optimize their revenue and better meet customer needs.