Variable pricing is a pricing strategy in which prices are set based on real-time data and can vary depending on a wide range of factors, such as market conditions, customer behavior, and competition. This approach allows businesses to quickly and accurately adjust their prices in response to changes in the market, and can help them maximize their revenue and profits. Variable pricing is the basis for a number of pricing techniques, such as revenue management, dynamic pricing, and yield management.
By using data to set fine-grained prices, businesses can more effectively respond to changes in the market and can better align their prices with customer needs and preferences. Some examples of variable pricing in action:
- An airline using yield management to adjust the prices of its plane tickets based on factors such as the time of day, the number of seats available on a particular flight, and the historical demand for that route
- An online retailer using dynamic pricing to adjust the prices of its products based on factors such as the competition, the availability of the product, and the customer’s purchase history
- A ride-hailing company using algorithms to adjust the prices of its services based on factors such as the demand for rides in a particular area, the availability of drivers, and the time of day
In each of these cases, the prices of the products or services are being adjusted in real time based on data inputs, allowing the businesses to more effectively respond to changes in the market and maximize their revenue and profits. The following are common ideas on how to use variable pricing.
Price discrimination is any pricing strategy that attempts to sell both to customers who are price sensitive and those who are relatively insensitive to price. For example, a manufacturer of sunglasses may set a low price for unpopular colors. Customers who are price sensitive may be tempted to buy a color that is on sale. Customers who aren’t price sensitive will buy the color they prefer.
Lowering a price based on inventory levels to clear items. Alternatively, a price may go up when an item is selling fast and you’ll soon run out of stock.
Basing prices on competitive intelligence. For example, lowering a price when a competitor launches a new product that is a threat to your market position.
Setting prices based on supply & demand forecasts. This can be done at a fine-grained level such as a seat on a flight. If you forecast that a particular seat might not sell you might offer it at a low price.
Dynamic pricing is a term for variable pricing that occurs in real time. For example, an ecommerce site that uses algorithms to set prices based on data such as inventory levels.
Setting higher prices during peak hours for infrastructure with fixed capacity such as roads.
Pricing can be used by cities and nations to meet sustainability goals such as air quality levels. For example, vehicle registration and license fees based on the emissions of the vehicle.
Yield management is the science of pricing inventory that occurs at a point in time such as a seat on a flight or a hotel room. Such inventory is limited in supply and may generate high prices when demand is high. Alternatively, such inventory goes to waste if it is not sold and is often discounted.