What is Variable Pricing?

Variable pricing is a system for altering the price of a product or service based on the current levels of supply and demand. It is commonly employed in environments where supply and demand information is easily available. It is more likely to be used by businesses that have a transactional orientation, which want to maximize the income from a single transaction. Other businesses that want to build relations with their customers are more likely to use fixed-rate pricing, which is less likely to annoy their customers.

Examples of Variable Pricing

As an example of variable pricing, the price of an item that is being sold through an auction will change depending upon the amount of demand for it, as evidenced by bid prices. The same principle works in a stock market, where the sale of new shares by a company will increase the supply, thereby dropping the stock price; conversely, intense demand to own a company's shares will increase the price of the shares on the market. Yet another example is airline seats, where an airline can adjust its pricing based on the number of seats that have already been sold. A final example is electricity production, where prices increase during periods of peak usage and decline thereafter.

Variable pricing also follows the business cycle. For example, the price of lawn mowers is high as the summer season approaches, since this is when demand spikes. Once the summer season is over, prices decline because there is little demand and sellers want to clear out their excess inventories.

Advantages of Variable Pricing

Variable pricing closely reflects the relationship between supply and demand, and so is a good way to maximize profits. Therefore, organizations for which profit maximization is a key concern are more likely to use variable pricing.

Disadvantages of Variable Pricing

Some companies refuse to use variable pricing, because they find that it annoys customers. For example, someone who paid a high price for a seat on an airplane will be annoyed if he finds that the person sitting next to him spent a fraction of that amount. Variable pricing also does not work in situations where pricing is physically fixed, such as when prices are manually affixed to goods.