Table of contents
What is variable pricing?
Variable pricing is a distinct pricing method directed at altering the price of a product based on the existing and relevant levels of supply and demand. The crucial point to understand is that this pricing strategy can be applied in a market where information about supply and demand is easily attainable. As an illustration, at an auction, the price of a product is directly representative of the degree of demand for it. In such a context, the demand is established through bids.
A similar approach can be applied to the stock market. The sales of the shares of a firm increase the supply, which drives the price in a particular direction. Keeping all in mind, variable pricing follows specific business cycles. It means that variable pricing aspects like seasons can determine the supply and demand and prices.
Often, variable pricing is used to optimize profits employing providing different prices for a similar product or service. Factors like the point of sale, date of the sale, and region of the sale have a direct impact on prices in the context of variable pricing. It is often perceived as a marketing strategy. A similar product or service is offered to buyers at varying prices.
Examples of variable pricing
There is a range of examples illustrating the nature of variable pricing. Such techniques are heavily used in the e-commerce industry. Companies like Amazon appeal to using different pricing experiments. Namely, they use strategies in which a price point for a product is determined by external factors that drive the maximization of the profit. Amazon openly appeals to varying prices. The company shows different prices on a similar product when advertising it on various websites.
Another example of variable pricing in e-commerce is eBay. The company sells products with a limited supply. Using an auction method, the business creates demand and determines the price based on the demand. Buyers compete for the product within the platform, which drives the price up. As a result, eBay maximizes its revenue and consumers' satisfaction by buying a product from a limited supply.
Variable pricing is used in the hotel and airline industries when it comes to different industries. For instance, prices for an airline ticket differ depending on the date, direction, and season. It creates the condition when two customers can get the same ticket at different prices. Similarly, when applying variable pricing to the hotel industry, the different prices for hotel rooms depend on seasonal factors.
The final interesting example of a variable pricing application comes from Uber. The company uses a variation of the strategy called the surge pricing model. The approach is determined by precise per mile rising with the demand for the service. A number of factors influence the demand. Firms like Uber use the model to boost profits during the high-demand period. In turn, companies offer low prices during the low demand period to attract customers.
Model of variable pricing
Essentially, there are three components of the variable pricing model:
- Based on demand. The model is designed based on the direct demand for the product. When such a model is applied, the prices go up. In turn, when the demand weakens, the prices go down.
- Based on location. The pricing model suggests that area of a store determines the price. For instance, if a store is located in some mainstream location, with high access to clients, the prices will be increased. In contrast, in areas of low density, the ones away from mainstream locations, the prices will be low.
- Based on groups. It is also known as a smart variable pricing model. Following the strategy, consumers are divided into various groups based on demographics. Based on the element, different groups are offered different pricing points. Some experts deem such a model as discriminating. Yet, it all depends on the demographic factors used to determine the price.
The models mentioned above constitute the root of variable pricing. Depending on the business and market, companies can apply various approaches.
Advantages of variable pricing
When it comes to the advantages of variable pricing, one can suggest the following:
- Increased profitability.
- Offseason sales.
- Attracting new clients.
These elements grant companies opportunities to sell new products at discounted prices for the sake of boosting demand. Besides, lowering prices during the off-season allows for controlling the demand. Finally, when a product is in demand, a business can increase profits.
Disadvantages of variable pricing?
Speaking about the disadvantages of variable pricing, the following elements are mentioned:
- Increased competition.
- Dislike among consumers.
- Adverse effect on customers’ loyalty.
- Possible lawsuits.
In such a regard, when customers see other consumers getting products for lower prices, it can result in refunds and litigation. Besides, clients witnessing companies boost profits by exploiting demand can change their brand perception. Finally, in the case of high demand, companies often engage in fierce competition, which can result in businesses selling products at lower prices, thus getting financial losses.
Variable pricing can be both beneficial and damaging. It depends on how well the strategy is applied and how reasonable companies approach their pricing strategies. Respectively, businesses operating with factors like location, seasons, and demographics often appeal to variable pricing to boost profits and attract clients depending on the demand at hand.
Find answers to some of the most common questions people have regarding the use of Competera.
What variable pricing means?
Variable pricing is a distinct pricing method directed at altering the price of a product based on the existing and relevant levels of supply and demand.
How can retailers evaluate the demand for new products?
The advanced pricing solutions using ML technologies are capable of identifying products most similar to new ones based on historical sales data. Then, the algorithms can accurately forecast the demand structure for a new product.