What is Variable Pricing?

Variable pricing is a common business model practice in which the price of a service or product is adjusted based on multiple factors such as demand, supply, competitor pricing, or external events. For example, tourist places like theme parks have altered pricing based on the season, week, and peak time.

This type of pricing strategy helps businesses charge more when demand is high and less when demand is low.

Industries like hotels, airlines, and e-commerce businesses are more apt at incorporating variable pricing in their commercial transactions. This is because of the fluctuating nature of demand and a limited supply of goods or services in those industries. Variable pricing allows them to stay in the competition and hit their target revenue goals.

For instance, in real estate, the rent price of a property depends on various aspects such as location, demand, economic environment, and season. This illustrates the market dynamics based on supply and demand.

When it comes to variable pricing implementation, customer perception is an important factor to consider. If customers show dissatisfaction, e.g., due to high prices, it can put you at risk. However, when instrumented properly, you can reap the rewards of attracting more customers and maximizing your business profit.

What Are the Various Variable Pricing Models?

Variable pricing works on various pricing models such as dynamic pricing, customized pricing, incline pricing, skimming pricing, pay-what-you-want pricing, penetration pricing, and bundling. Let’s explore them more closely.

Dynamic Pricing

This type of pricing model adjusts prices based on real-time changes in demand. Through the use of algorithms, it charges different prices minute to minute, hour to hour, or day to day. Industries like rental cars, airlines, and hotels are some of the common examples that implement this variable pricing model.

Customized Pricing

Customized pricing is prevalent in subscription-based businesses where different prices are offered to different customers based on their needs.

For example, SubscriptionFlow empowers customers to set custom prices for their subscription plans according to the features required. This personalization enhances customer satisfaction and loyalty.

Incline Pricing

In this pricing method, businesses have the flexibility to fix several prices for the same product during any phase of the sale. It works on a tiered model, where the price of a product or service increases as the quantity purchased increases.

For instance, subscription-based businesses allocate different pricing tiers based on customer consumption.

Skimming Pricing

When a product or service is first launched, businesses usually charge more. As the demand gradually decreases, the price is also lowered. The initial stage of charm targets early adopters, a limited segment of the customer base who are willing to buy the service at a higher price.

When that target is achieved and competition gets higher, businesses lower their prices to appeal to larger audiences.

Pay-What-You-Want

Businesses give customers the freedom to choose the price they want to pay. This type of pricing model is not popular; however, it is still adopted by some industries. For instance, software service providers may offer a pay-what-you-want option to users after the free trial is over.

Penetration Pricing

Penetration pricing is a marketing strategy that attracts more customers at the beginning of the product launch by setting a lower price. It is a classic ‘land and expand’ example, where after a large number of customers are secured, the product or service prices are hiked.

Bundling

Bundling is when a business sells multiple items together at a discounted price. For example, when purchasing Microsoft 365, you would also get access to Word, Excel, OneDrive, PowerPoint, and Outlook at a lower price. Bundling helps businesses drive out excess inventory and increase sales.

What Are the Examples of Variable Pricing?

Variable pricing is used in many industries, with a variety of examples illustrating its significance. Variable pricing, as opposed to fixed pricing that maintains constancy despite market fluctuations, is based on price adjustments.

An example of this type of sales strategy is Uber. Uber is a renowned ride-hailing business that uses a modified version of the variable pricing strategy called the surge pricing model.

Through this approach, it charges customers based on the precise mileage utilized and demand surges. They generate the majority of their revenue during high-demand periods and offer lower prices when the demand is low.

Variable pricing is a sought-after pricing model in the e-commerce market as well. A notable candidate in the e-commerce realm is Amazon. It uses the dynamic pricing strategy to adjust prices in real-time.

Factors such as demand, stock levels, competitor pricing, and customer behavior determine the product cost. For instance, a competitor decreasing their prices may also lead Amazon to cut its costs. Similarly, if there is a shortage of a product (it’s low in stock), then its price is likely to increase.

Airlines also conduct their business activities based on a similar pricing model. They sell plane ticket prices based on the date, season, and seat availability. This helps them manage capacity and generate maximum revenue.

What Are the Advantages of Variable Pricing?

There are numerous benefits of variable pricing for businesses. Some key benefits are identified below.

Offer Different Prices

Businesses can charge multiple prices for products that have extended features. This means that the product price is dependent on the feature each customer requires. Through this, the customer’s perceived value of the product can be matched to its price, allowing for a smoother purchase experience.

Gain Control

Implementing variable pricing allows businesses to exercise control over the demand. For example, during the off-season, they can lower their prices to attract a larger customer base. And then during the high-demand season, they can increase their prices as normal. This leads to improved margins.

Ensure Quality

Another benefit of variable pricing is that during peak seasons, the number of customers is lower. How this benefits companies is that they have limited customers to serve, so they can ensure a high level of quality and service. This enables businesses to increase customer retention and loyalty.

What Are the Disadvantages of Variable Pricing?

When it comes to variable pricing, the following are some of the drawbacks you should keep in mind:

Complex Integration

For some businesses, implementing variable pricing may be too complex. Integrating variable pricing requires backing from robust systems, especially revenue optimization systems, that can conduct market analysis. However, it requires time, money, and the proper expertise. Hence, it can be a challenge to build the proper variable pricing structure.

Negative Customer Perception

Another disadvantage of variable pricing is how customers perceive it. While customer perception may be positive in most cases, there are instances where customers may feel dissatisfied.

Firstly, when they find that the price of the product they purchased has lowered shortly after. Second, when the price fluctuates regularly and they’re unable to determine the actual value of the product. Lastly, customers may feel that lower prices mean lower quality. These factors lead to customer dissatisfaction, reduced perceived value, and customer resistance.

Risked Reputation

Using dynamic pricing to increase prices during peak seasons may damage the reputation of a business. This happens because customers feel exploited, leading to a distrustful view of the company.

To gain the trust of customers while leveraging your variable pricing strategy, focus on being transparent and keeping customer satisfaction in mind.

How Does SubscriptionFlow Support Businesses with Variable Pricing?

SubscriptionFlow supports businesses with variable pricing by offering enhanced flexibility, cost-efficiency, customization, and automation. Businesses can easily integrate this pricing model and streamline their subscription management processes.

SubscriptionFlow offers the following variable pricing features to support businesses:

Multi-tiered Pricing

SubscriptionFlow allows businesses to offer multiple pricing tiers to their customers. Each tier has different features and costs. Customers can choose the one that fits them best based on their budget and needs.

Personalized Invoices

Managing processes like billing and invoicing is a hassle for businesses. With SubscriptionFlow, you not only get automated billing and invoicing management but also benefit from customization. Each invoice reflects the specific variable pricing registered to the customers.

Workable Billing Intervals

When customers are billed based on the subscription plan they choose, they can also select the time they want to be billed. SubscriptionFlow offers multiple billing schedules, like weekly, monthly, quarterly, and annually. This flexibility enables businesses to retain customers and increase their overall satisfaction.

Usage-Based Billing

SubscriptionFlow charges customers based on the services they subscribed to. In other words, the actual consumption of the product or service determines the total bill. Due to its adaptability, SubscriptionFlow empowers businesses to accommodate various customer needs, ultimately helping them scale.

Multiple Payment Gateways Integration

This billing software supports various payment gateways like PayPal, Adyen, Stripe, and Braintree. This diverse range of payment options helps businesses target an international customer base. Moreover, SubscriptionFlow ensures utmost security and seamlessness.

Discounts

With SubscriptionFlow, you can automatically create and apply discounts and promotions to your variable pricing strategy. This helps you grow your business while enriching the customer experience.

Advanced Analytics

To successfully expand your business, understanding potential gaps in your workflows is crucial. For this need, SubscriptionFlow provides comprehensive reports and analysis to help you work out the discrepancies and make informed decisions. If you require assistance with implementing data-driven decision-making regarding the variable pricing strategy, SubscriptionFlow also offers expert services to scale your business and optimize cash flow.

What Can Businesses Gain from SubscriptionFlow’s Variable Pricing Features?

SubscriptionFlow’s variable pricing features allow businesses to gain a wider range of users, offer more transparency, optimize flexibility, improve cash flow, reduce churn, and build stronger relationships.

Businesses can leverage secure, PCI-compliant revenue optimization strategies that don’t falter under pressure. Through enhanced automation and control over your variable pricing model, you can position your business on an upward trajectory.