Variable Pricing
Variable pricing definition – AccountingTools
What is Variable Pricing? Variable pricing is a system for altering the price of a product or service based on the current levels of supply and demand. It is commonly employed in environments where supply and demand information is easily available. For example, the price of an item that is being sold through an auction will change depending upon the amount of demand for it, as evidenced by bid prices. The same principle works in a stock market, where the sale of new shares by a company will increase the supply, thereby dropping the stock price; conversely, intense demand to own a company’s shares will increase the price of the shares on the market. Yet another example is airline seats, where an airline can adjust its pricing based on the number of seats that have already been sold. Another example is electricity production, where prices increase during periods of peak usage and decline riable pricing also follows the business cycle. For example, the price of lawn mowers is high as the summer season approaches, since this is when demand spikes. Once the summer season is over, prices decline because there is little demand and sellers want to clear out their excess vantages of Variable PricingVariable pricing closely reflects the relationship between supply and demand, and so is a good way to maximize profits. Therefore, organizations for which profit maximization is a key concern are more likely to use variable pricing. Disadvantages of Variable PricingSome companies refuse to use variable pricing, because they find that it annoys customers. For example, someone who paid a high price for a seat on an airplane will be annoyed if he finds that the person sitting next to him spent a fraction of that amount. Variable pricing also does not work in situations where pricing is physically fixed, such as when prices are manually affixed to lated CoursesRevenue Management Revenue Recognition
Definition of “Smoothing” or “Variable Pricing” – Small …
Variable pricing is a pricing strategy where a business offers varying price points at different locations or points-of-sale. This is a common approach used by retailers when the costs of offering certain goods and services and the level of market demand justify it. The objective is to optimize overall profit by offering the best prices at each point-of-sale. Examples A common example of variable pricing is when a retailer offers different prices on its website than it does in stores. This is often due to lower costs in online operations. Some retail chains offer lower prices in different community stores because of lower property taxes or other cost factors that vary. Though effective in optimizing profit, variable pricing can lead to customer alienation in some cases. References Writer Bio Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.
Variable Pricing: Definition, Examples, Model and Advantages
Variable Pricing can be defined as the pricing strategy to optimize Profit by offering different prices for the same product or service vary based on point of sale, a region of sale, date of the sale, and other factors.
Variable pricing is a marketing strategy to sell products to consumers at different prices. The same good is sold at a varying price depending on the demand of the product at a certain time or certain region. Variable pricing technique is used by retailers quite often to generate a profit on the goods.
You must have noticed that a product that you see in a store can be bought at much cheaper prices online. Because of this reason, many people check the price of the product online before making a purchase decision in a physical store.
The price of the product is decided based on various factors such as service required to produce and maintain the products and the demand and supply of the product. For example, the demand for Air conditioners is quite high in summer.
As a result, an upsurge in the price of air conditioner can be observed in summers whereas same air conditioners are sold at heavy discounts offseason.
Even though sometimes consumers complaints about the varying prices of the products, but there are many companies which have taken advantage of this technique and generated profits. In the next section, you will learn about a few examples of companies which have successfully implemented the variable pricing technique and attracted customers.
Examples of variable pricing#1 Variable pricing technique is heavily used by e-commerce companies:#2 Another example of the use of variable pricing by e-commerce companies is the example of eBay e-commerce business:#3 Variable pricing technique is heavily used in the airline and hotel industries:#4 Similar to the airline and hotel industry “Uber” is also known for using surge pricing model:Model of Variable Pricing#1 Variable Pricing Based on demand:#2 Variable Pricing based on Location:#3 Variable Pricing Based on Groups:Advantages of Variable Pricing#1 Variable pricing technique helps in increasing profit:#2 Sales can be made during the offseason:#3 Attract new consumers:Disadvantages of variable pricing#1 Not liked by a few customers:#2 Competition increases among companies selling the same product:#3 It impacts the loyalty of customers:#4 More lawsuit cases:#5 It might put a reverse effect on the sales:
Examples of variable pricing
#1 Variable pricing technique is heavily used by e-commerce companies:
e-commerce businesses like Amazon constantly experiment with the price of a product to determine the price point where they generate a maximum profit on the sale of that product.
Even they show the price of the same product on different websites’ advertising and different price of the same product to different customers.
Variable pricing technique is not only used by Amazon, but there are several other e-commerce websites which are using variable pricing in a different way to generate profit.
#2 Another example of the use of variable pricing by e-commerce companies is the example of eBay e-commerce business:
eBay sells products with limited supply using the auction method. In the auction technique, buyers compete with one another to get their hand on the product.
In this way, eBay maximizes its profits, and customers get the satisfaction of getting the product by competing for it, and they don’t feel bad for paying more to get the product.
This variable pricing technique creates a win-win situation for both the company and its customers.
#3 Variable pricing technique is heavily used in the airline and hotel industries:
It is commonly observed that the prices of air ticket vary depending on the season, date, and, demand. It is commonly observed that two travelers got the same ticket to the same destination at different prices.
The airlines change the prices of the tickets of the airplane when there is high demand, especially in the festive season when people travel to be with their family and loved ones.
Similarly, in the hotel industry, the different prices of hotel rooms can be seen for the same type of room on different hotel booking platforms and also the rooms near tourist attraction available at cheap prices during off season and the prices of the same rooms hiked up when there is high demand.
#4 Similar to the airline and hotel industry “Uber” is also known for using surge pricing model:
The price per kilometer rises when there is a rise in the demand for uber service. Companies use this technique to drive more profit during the demand period, and the low prices are offered to attract customers during the low demand period.
Model of Variable Pricing
#1 Variable Pricing Based on demand:
This model of variable pricing is designed based on the demand for the product. Some products and services are more in demand during a certain period.
During the demand period, the prices of the products raised and are lowered when they are not in demand to let new customers try that product.
For example, the price of hotel rooms at tourist places peak up during the rush season, and another example of this variable pricing model based on demand is the sale on off-season clothes. Usually, stores sell clothes of the winter season on heavy discounts during the summer season.
#2 Variable Pricing based on Location:
Now, this pricing model works on the basis of the location of the store. Stores which are located at the central or mainstream location of the town. Whereas the same store located at the less popular place might sell the same product at lower rates.
The reason behind adopting this model is to increase the foot traffic in those stores. For example, a store of the same brand might sell the same product at high prices than a store located in suburban areas.
#3 Variable Pricing Based on Groups:
This is a smart variable pricing model.
In this model, the consumers of a product or service are divided into different groups based on their location, type, and demographic information, etc. Then the same product is sold to these different groups at different prices on the basis of their categorization.
However, this model is not liked by most consumers, and there have been many lawsuits filed against this model of variable pricing.
Advantages of Variable Pricing
There are several advantages of variable pricing. Because of this reason, these variable pricing strategies are widely used by many companies. Let us learn about the advantages of variable pricing next.
#1 Variable pricing technique helps in increasing profit:
Increasing the price of a product when it is in demand to get you additional profit. If people need the product, they would be willing to pay any price.
For example, during the Christmas season Christmas trees are in great demand and people are ready to pay any price to get the best and most beautiful looking tree for their family.
At this time, you could sell trees to them at an increased price to enhance profit.
#2 Sales can be made during the offseason:
There are some products which can be used in a particular season and their sale decreases tremendously when the season ends. However, there is a category of consumers who keep an eye on the off-season sale to grab the things they desire at economical prices.
By lowering the prices of products during offseason bring you profit rather than extra expenditure on the inventory management for the whole year.
#3 Attract new consumers:
People have a tendency to try new products when these products are sold at discount prices. By putting certain products at discount prices will make new customers to try those products.
In this way, you will not only increase sale but will also increase the customer base for the product.
Disadvantages of variable pricing
#1 Not liked by a few customers:
Customers who understand the pricing patterns of products usually don’t like these techniques. They feel bad for paying more than others for the same product.
#2 Competition increases among companies selling the same product:
Variable pricing has the potential to cause unhealthy competition among the companies which are part of the same industry. When a company sees that the other company has started selling products at lower prices and they are making a profit from it, the company also reduces the prices to be in the competition.
This creates a war between the companies, and they end up making a huge loss by selling products at lower prices.
#3 It impacts the loyalty of customers:
Customers stay loyal to the company that they trust, and they know that the company is providing the best products at the best prices.
However, when companies start selling products at variable pricing, then customers buy the products of the companies which are selling the products at the lowest prices.
Customers become more concerned about the price of the product then the brand of the product.
#4 More lawsuit cases:
Customers feel bad that somebody else has got the same product at much cheaper prices. Sometimes customers ask for the refund from the companies when they learn about this, and some customers even file a legal lawsuit against the company.
#5 It might put a reverse effect on the sales:
Most consumers have a mindset that the quality of the products is better if they are paying more for it. They believe that the products which are sold at lower prices are of poor quality. Hence, you end up losing sales.
Frequently Asked Questions about variable pricing
What is an example of variable pricing?
Examples. A common example of variable pricing is when a retailer offers different prices on its website than it does in stores. This is often due to lower costs in online operations. Some retail chains offer lower prices in different community stores because of lower property taxes or other cost factors that vary.
What is variable pricing strategy?
A variable pricing strategy is a pricing method in which the price of a product may vary based on region, sales location, date, or other factors. “The price could change as you move from region to region,” he said. “There’s no surprise in that. Two different sales locations could have different pricing.Apr 5, 2015
How do you explain variable pricing?
Variable pricing is a marketing strategy to sell products to consumers at different prices. The same good is sold at a varying price depending on the demand of the product at a certain time or certain region. Variable pricing technique is used by retailers quite often to generate a profit on the goods.Jul 7, 2019
