What is variable pricing?

What is variable pricing?

Variable pricing is a pricing strategy in which companies adjust the prices of their products or services based on specific variables such as demand, seasonality, geographic location or existing promotions.

This pricing method helps companies respond more effectively to market fluctuations and changing consumer preferences. It’s by no means new that distributors resort to variable pricing to increase their prices when demand is high - and reduce them when demand falls - to increase sales of those products.  

For example, depending on the time of year, retailers use variable pricing to reduce the prices of seasonal products, such as swimwear or coats, at the end of each promotional campaign to make room for new goods.

Advantages and disadvantages of variable pricing

As with any other pricing strategy, variable pricing has various pros and cons that you should be aware of before deciding whether to implement it.

Advantages of variable pricing

• It allows revenue optimization by setting prices based on demand and competitor movements.
• It makes it possible to react quickly to market and consumer habits changes, adjusting prices to make the most of opportunities, and avoid losses when demand is low.
• It helps balance inventory levels, raising prices on limited stock products and lowering prices to avoid overstock.

Disadvantages of variable pricing

• Consumers may perceive continuous price adjustments negatively, so they must be handled extremely carefully.
• There is a risk that a price war with competitors will cause excessive damage to profit margins and devalue the product

It requires advanced technology capable of collecting and analyzing multiple variables to implement it effectively.

Variable Pricing vs Dynamic Pricing

Variable Pricing is a strategy that involves adjusting the prices of products or services based on predetermined variables such as the season, demand or specific events. This allows companies to set differing prices for the same product at various times of the year—or in different situations—without making real-time changes. For example, a hotel may have a standard out-of-season room rate but increase prices during peak season.

Dynamic Pricing is much more agile. Its algorithms make it possible to change prices automatically in response to rapid changes in market conditions. This strategy requires advanced machine learning and data analytics technologies to constantly adjust prices to maximize revenue or market share. A well-known example of dynamic pricing is the airlines’ model, where the ticket price can vary from one minute to the next, depending on demand, availability, and other competitive factors.

Therefore, the main difference between these two strategies lies in their adaptability and response to the market. Variable Pricing establishes prices according to a predefined set of rules and conditions. Dynamic Pricing responds instantly to market conditions by using big data to optimize prices at all times and ensure optimal decisions at any given moment. The effectiveness of each strategy will depend on the type of business.

Whatever the case, you’re probably interested to learn more about Reactev’s Price Management Software. It will allow you to offer your products at competitive prices without losing margins, regardless of fluctuations in demand or what your competitors do.