Variable pricing
Encyclopedia
Most firms use a fixed price
policy. That is, they examine the situation, determine an appropriate price, and leave the price fixed at that amount until the situation changes, at which point they go through the process again. The alternative has been variable pricing, a form of first degree price discrimination, characterized by individual bargaining and negotiation, and typically used for highly differentiated, high value items (like real estate).
Two variants of variable pricing are price shading (in which sales people are given the authority to vary the price by a certain amount or percentage), and auction
s (in which potential buyers have the option of bidding on a product and thereby varying the price). Consumers generally prefer fixed prices because they don’t need to worry about being out-negotiated by a professional with expert knowledge and skills. The exceptions are people that enjoy the social aspect of negotiating, and people that think they might have an advantage due to their product knowledge or negotiating skills.
Due to advances in technology, another variant of variable pricing, called real-time pricing, has arisen. In some markets events occur so fast that there is insufficient time to either set a fixed price or engage in lengthy negotiations. By the time you have all the information to determine a price, everything has changed. Examples include Airline tickets, stock market
s and foreign exchange market
s. In each case prices can change in less than a second. By linking all the market participants through internet connections, price changes are disseminated instantly as they occur.
A variant of real time pricing is online auction business model (such as eBay
). All participants can view the price changes soon after they occur (technically this is not quite real time pricing because there is a delay built into the eBay system). Traditional auctions are inefficient because they require bidders (or their representatives) to be physically present. By solving this problem, online auctions reduce the transaction costs for bidders, increase the number of bidders, and increase the average bid price.
In addition to these examples of variable pricing in the short term, there are long term pricing practices that could be considered instances of variable pricing. They are price skimming
, penetration pricing
, and seasonal discounts.
Sales are a traditional example of discriminatory pricing. During the holiday season prices are high. Come the new year there are sales. Other examples of sales occur on various goods such as appliances and cars. Electronics, clothes washers/dryers, etc. typically have a season of the year where sales occur. Cars are sold at discounts before the new model year. Discriminatory pricing is not always bad. It helps people who will/cannot pay "list" or even street price an opportunity to buy at a better price if they are willing to wait andor to buy older models. At the same time it helps merchants clear out old stock andor items that they misjudged the market for.
This kind of price discrimination is largely and widely used by rental car companies. Usually those firms need to know what your country of residence is so they can adjust the price. Depending on the answer you can get significantly different quotes for the same vehicle, date and time of rental. It is also true when accessing the rental car site through the .com main site.
Fixed price
The term "fixed price" is a phrase used in the English language to mean that no bargaining is allowed over the price of a good or, less commonly, a service...
policy. That is, they examine the situation, determine an appropriate price, and leave the price fixed at that amount until the situation changes, at which point they go through the process again. The alternative has been variable pricing, a form of first degree price discrimination, characterized by individual bargaining and negotiation, and typically used for highly differentiated, high value items (like real estate).
Two variants of variable pricing are price shading (in which sales people are given the authority to vary the price by a certain amount or percentage), and auction
Auction
An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder...
s (in which potential buyers have the option of bidding on a product and thereby varying the price). Consumers generally prefer fixed prices because they don’t need to worry about being out-negotiated by a professional with expert knowledge and skills. The exceptions are people that enjoy the social aspect of negotiating, and people that think they might have an advantage due to their product knowledge or negotiating skills.
Due to advances in technology, another variant of variable pricing, called real-time pricing, has arisen. In some markets events occur so fast that there is insufficient time to either set a fixed price or engage in lengthy negotiations. By the time you have all the information to determine a price, everything has changed. Examples include Airline tickets, stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
s and foreign exchange market
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
s. In each case prices can change in less than a second. By linking all the market participants through internet connections, price changes are disseminated instantly as they occur.
A variant of real time pricing is online auction business model (such as eBay
EBay
eBay Inc. is an American internet consumer-to-consumer corporation that manages eBay.com, an online auction and shopping website in which people and businesses buy and sell a broad variety of goods and services worldwide...
). All participants can view the price changes soon after they occur (technically this is not quite real time pricing because there is a delay built into the eBay system). Traditional auctions are inefficient because they require bidders (or their representatives) to be physically present. By solving this problem, online auctions reduce the transaction costs for bidders, increase the number of bidders, and increase the average bid price.
In addition to these examples of variable pricing in the short term, there are long term pricing practices that could be considered instances of variable pricing. They are price skimming
Price skimming
Price skimming is a pricing strategy in which a marketer sets a relatively high price for a product or service at first, then lowers the price over time. It is a temporal version of price discrimination/yield management...
, penetration pricing
Penetration pricing
Penetration pricing is the pricing technique of setting a relatively low initial entry price, often lower than the eventual market price, to attract new customers. The strategy works on the expectation that customers will switch to the new brand because of the lower price...
, and seasonal discounts.
Sales are a traditional example of discriminatory pricing. During the holiday season prices are high. Come the new year there are sales. Other examples of sales occur on various goods such as appliances and cars. Electronics, clothes washers/dryers, etc. typically have a season of the year where sales occur. Cars are sold at discounts before the new model year. Discriminatory pricing is not always bad. It helps people who will/cannot pay "list" or even street price an opportunity to buy at a better price if they are willing to wait andor to buy older models. At the same time it helps merchants clear out old stock andor items that they misjudged the market for.
This kind of price discrimination is largely and widely used by rental car companies. Usually those firms need to know what your country of residence is so they can adjust the price. Depending on the answer you can get significantly different quotes for the same vehicle, date and time of rental. It is also true when accessing the rental car site through the .com main site.
See also
- PricingPricingPricing is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product. Pricing is also a key variable in microeconomic price allocation theory. Pricing is a...
- Price discriminationPrice discriminationPrice discrimination or price differentiation exists when sales of identical goods or services are transacted at different prices from the same provider...
- MarketingMarketingMarketing is the process used to determine what products or services may be of interest to customers, and the strategy to use in sales, communications and business development. It generates the strategy that underlies sales techniques, business communication, and business developments...
- Yield managementYield managementRevenue management is the process of understanding, anticipating and influencing consumer behavior in order to maximize yield or profits from a fixed, perishable resource...
- Geo (marketing)Geo (marketing)As a general term, Geomarketing is the integration of Geographical intelligence into all marketing aspects including sales and distribution. Geomarketing Research is the use of geographic parameters in research methodology starting from sampling, data collection, analysis, and...
- e-marketing