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What is Variable Pricing & How to Take Advantage of the Strategy?

By Priceva
on October 27, 2022
When running an e-commerce business, you cannot be a leader in your niche without being flexible and adjusting your prices. The variable pricing strategy allows retailers to deliver expected price rates and make enticing offers for consumers. This guide dwells upon the peculiarities of this approach: you will find out how exactly it works, how e-commerce projects apply it on their online stores, and what its benefits and drawbacks are. Read this article to the end – we will share the secret of implementing this strategy successfully.

Variable Pricing Definition

Variable pricing is a method that implies adjusting a product's price depending on the current levels of supply and demand. This approach applies well to the e-commerce industry because it is easy to obtain the information about prices on the market and change rates on the go. Variable pricing follows specific business cycles and depends on certain aspects like seasons.

Also, variable pricing means that a business offers different rates in different locations or points of sale. For example, it can sell online cheaper than in brick-and-mortar stores. Pricing in different countries and regions also varies – this is a common strategy among international retailers.

The key point of variable pricing strategies is to maximize sales and profit by delivering optimal prices for specific market segments. However, this approach should be applied carefully so as not to frustrate customers because some of them may deem it unfair.

Examples of Variable Pricing

Variable pricing is widely used in the e-commerce industry, so we will go over examples from the most prominent marketplaces.

The American giant eBay uses the auction method: it sells items with a limited supply. When an auction is launched, the demand for the product skyrockets, pushing the price up. It allows eBay to maximize revenue and satisfy customers who get the chance to buy an exclusive product.

Amazon often experiments with varying rates and changes prices 2.5 mln times a day! Smart algorithms calculate the best rates for consumers based on a multitude of factors, including demand and consumer behavior, inventory level, competitors’ pricing, market trends, and so on.


Model of Variable Pricing

Let’s face it: hardly any company possesses technical capacities on par with Amazon’s high-end pricing intelligence tools. The good news is your e-commerce business can benefit from variable pricing strategies by sticking to the right algorithms and reference points. Here are the most efficient and commonly utilized models of variable price formation.

Demand

This model depends on the current demand for a product, which means pricing changes according to seasonality or certain periods. When demand is high, prices are raised so that the retailer can maximize profit. During a low demand period, prices are reduced to allow new customers to try the product.

The demand model is used by clothing stores: their pricing strategy evolves around seasonality. Light clothes are more expensive during summer, while warm clothes from previous collections can be bought at a large discount from May to September. This approach allows them to target different market segments and sell off old stock while securing a profit.

Location

This strategy is used by the majority of international e-commerce businesses: they identify average agreeable prices for each specific location and charge correspondingly. In this case, prices depend on consumers’ buying power and product popularity. Hence, the location model allows retailers to target audience segments more efficiently and increase traffic in their stores. By the way, this strategy can be practiced within a single country or even city.

Groups

This pricing model is reminiscent of the above-mentioned one, but requires a deeper demographic analysis. The group model implies dividing customers into several groups based on their location, age, gender, social background, and so on. The same product is sold at different prices for different categories.

Advantages of Variable Pricing

Like any dynamic strategy, variable pricing comes with flexibility that entails a bunch of advantages for retailers. Let’s go over the major benefits of this approach.

It Boosts Profit

Increasing the price during a high-demand period can bring you extra profit because people that are in need of a product right now are willing to pay any price for it. For example, fans and air conditioning equipment become a must-have during hot sunny days, so consumers are ready to overpay for the sake of their well-being. High demand season is the best time to raise prices without scaring consumers away.

Sales Can be Made During the Offseason

Opposite to the previous point, variable pricing allows you to maintain sales volume of products during low seasons. By charging less and making discounts, you allow less affluent customer segments to grab the things they could not afford at the full price. By reducing prices moderately, you drive purchases while scaling your profits because more people are ready to buy. Besides, this approach is great for getting rid of old inventory piling up in your warehouses.

It Helps to Attract Customers

People are more likely to try new products when they are sold at discounted rates – they are less likely to regret the purchase even if they did not like the item. So whenever you see low demand for a newly introduced or unpopular product, consider organizing a sale. It will generate more traffic and grow the customer base. That’s a significant benefit for your brand as a whole.

Disadvantages of Variable Pricing

As we’ve mentioned, you need to be cautious when introducing variable pricing because this strategy has some drawbacks and can repel potential customers when done incorrectly. Below are the reasons why this pricing approach might fail.

Not Liked by Some Customers

Customers may get annoyed after seeing different prices on different webstores – this is a normal reaction of a person who does not understand how marketing strategies work. Some people may regret buying a product for a higher price, others may feel scammed. In any case, serious price discrepancies may hurt your brand’s image and disrupt consumer trust.

Competition Increases Among Companies Selling the Same

Variable pricing might become the starting point of a price war between businesses operating in the same niche. When competitors see you charge less, they start reducing their rates to encourage product purchases and maintain customer traffic. As a result, all market players may be involved in a race to the bottom. This is an unhealthy situation that could badly hurt profits and your relationships with peer companies.

It Impacts the Loyalty of Customers

Customers tend to trust brands that stay consistent and predictable in their pricing policy, which is not the case with variable pricing. First, they might be annoyed when confronted with the same product at a larger discount in another store. Second, some customers are more concerned with prices rather than the brand or product value.

It Might Put a Reverse Effect on Sales

In direct contrast to the previous point, some customers do not hunt for discounts at all – they believe that quality products cannot be cheap. Hence, you risk losing sales when you start charging less than usual.

Conclusion

Variable pricing is an efficient strategy that allows e-commerce businesses to stay competitive and maintain a high profit margin. Businesses that apply this approach adjust prices based on seasons, locations and demographics. However, variable pricing strategies should be practiced carefully because some customers may regard them as inconsistent and will regret having paid more than the current rate.

In order to introduce variable pricing safely, you need to take into consideration market trends and be ready to adjust prices proactively. Use dynamic pricing software by Priceva – it will help you track competitor rates, automatically update your webstores and provide optimal pricing recommendations.

FAQ

Who uses variable pricing?

Variable pricing is often used by airlines and hotels that charge more during the high season and less when the demand is low. E-commerce businesses also use this approach because it allows them to skim profits when customers need the product and have no choice but to pay more.

What is the difference between variable and dynamic pricing?

When you employ a variable pricing strategy, the cost of items varies based on the day, but does not change much over a certain period (most often, a season). When it comes to dynamic pricing, it also varies but more often – price adjustments can be made several times per day depending on the technical capabilities of the e-commerce platform. Prices can be updated automatically or manually based on stock, competitor rates, customer behavior and lots of other external factors.

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