Is Variable Pricing Right for Your Business? Here Are the Benefits and Risks

• What is variable pricing?
• Common variable pricing types and models
• Advantages and disadvantages of variable pricing
• How to implement variable pricing

Variable pricing is a pricing strategy in which the cost of a product or service changes based on specific factors in the economic environment. These factors can include things such as supply and demand, customer segment, and the time of the purchase.

Unlike fixed pricing — where the price remains consistent regardless of market conditions — variable pricing adjusts dynamically to optimise revenue, respond to market changes, and react to unforeseen events in real time. Combined with revenue management software, it allows businesses to offer pricing tailoured to customer segments, demand surges, and market conditions.

However, while variable pricing may sound like a perfect solution to business owners, be sure to approach it with care. When not properly managed and transparent, customers may lose trust, impacting long-term loyalty.

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The variable pricing model is used by a variety of businesses, especially software as a service (SaaS)-based companies and traditional subscription services. This pricing strategy is also applied in retail, travel, hospitality, and education sectors.

A large part of the appeal of the variable pricing model is its flexibility. Instead of paying a fixed price for a product or service, customers are paying for what they’re actually consuming — according to their needs and financial constraints. It’s very cost-effective. For many users, especially those who have fluctuating budgets, the variable pricing model may actually lead to significant savings.

Some examples of variable pricing include:

• Usage-based pricing: Also called pay-per-use or a consumption model, usage-based pricing means exactly what it sounds like: Customers only pay for the products or services they actually use.
• Volume-based pricing: Customers receive a discount price for products and services when they consume more. This model is popular with SaaS models and warehouse club retailers.
• Tiered pricing: This is when merchants offer different pricing plans based on the level of features, volume, or usage. For example, one customer may decide to pay $10 a month for a basic subscription to a streaming service with adverts. Another may choose a subscription loaded with premium channels, live TV, and no adverts for $96 a month.
• Product-based pricing: In this model, the price is tied directly to the product itself. For example, the cost of a digital camera will be influenced by production cost, market demand, and the pricing strategy of the competition.
• Dynamic pricing: This is when businesses change their prices in response to changes in customer demand. This model is common in hotels and ride-sharing services, where prices fluctuate based on factors such as the time of booking, demand levels, and availability.
• Seasonal pricing: Prices vary depending on the time of year. For example, an airline may charge higher prices for travel during the holidays or offer lower rates during the off-season.
• Geographic pricing: Companies may adjust prices based on the location of the customer, often due to local competition or economic conditions.
• Segmented pricing: Different customer segments might receive different prices for the same product or service. For example, a company that offers segmented pricing will enjoy maximum profits from those willing to pay full price. That same company can also foster customer loyalty and repeat business with membership programmes. The company can even earn a bit of goodwill (and good PR) with discounts for special groups such as seniors, students, and veterans.
• Peak and off-peak pricing: This model is used by utilities such as gas, telephone, and electric companies. It's also used by event and concert venues. Instead of changing prices during certain times of year, as they would with the seasonal pricing model, companies charge higher prices during times of peak demand and lower prices when demand decreases.

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The advantages of variable pricing — especially with an assist from artificial intelligence (AI) — are clear. When they apply it successfully, businesses can maximise revenue by adjusting pricing according to demand. One study conducted by the Harvard Business Review saw a 15% increase in revenue and a 10% increase in profit when an AI-powered pricing model was applied to its sample. But there are also potential pitfalls. Here are a few of each.

• Flexibility: Companies can charge a premium for products and services when demand is high — for example, the cost of a concert ticket by a wildly successful artist. Those same companies can capture customers they may have missed by offering a lower price when demand is soft, such as when an artist's management company overestimates its client's popularity. The variable pricing model is also flexible, allowing businesses to respond quickly to changing market conditions, competition, and consumer behaviour. With revenue management software, companies have data on individual customer preferences and behaviour. Armed with this valuable information, businesses can use variable pricing to offer tailored discounts or deals, increasing customer satisfaction and loyalty.
• Maximised revenue: During periods of high demand, businesses can raise prices, significantly increasing profit margins without a proportional increase in costs. When there's high demand, more people are willing to pay a premium — and companies don't have to spend extra money on marketing to capture those customers. When companies have excess inventory, a variable pricing model can lower prices to get rid of slow-moving products. Conversely, it can discourage sales of limited stock with higher prices. Companies may do this to create an aura of exclusivity — the scarcity of one prestige product can increase overall desirability for the brand. For example, think of a certain leather handbag with a years-long waiting list.
• Personalisation: Variable pricing can tailor the cost for a specific customer and offer customised pricing based on the customer's needs and usage patterns. These patterns can be discovered and analysed with a robust customer relationship management (CRM) platform. Customers who receive this kind of personalised pricing are more likely to develop loyalty to a specific brand — more than half (56%) of consumers say they will become repeat buyers after a personalised experience, according to the 2023 State of Personalisation report.

• Customer frustration: While variable pricing may sound great, there is the very real possibility of angering customers if they feel they're being treated unfairly. Frequent or unpredictable price changes may make customers feel like they're being overcharged. An example of this is when a surge in prices occurs during an emergency such as a natural disaster. When faced with food and plane tickets that cost three or four times their usual price, consumers may rightly believe that companies are taking advantage of the situation. The resulting bad publicity may not be worth the temporary increase in profits.
• Negative perception: Aside from clearly exploitative circumstances, inconsistent pricing may harm a company's reputation. If consumers feel they are being treated unequally, it erodes trust and brand loyalty. When asked by Civic Science whether dynamic pricing is gouging, 44% of respondents strongly agreed and 24% somewhat agreed — not exactly a great way to burnish your brand. And your customers may respond to a variable pricing strategy by delaying a purchase in hopes of a price drop. This may potentially lead to lower overall sales.
• Risk of racing to the bottom: Your market rivals may react to price changes, which can lead to a price war, negatively impacting your profitability in the long run. But with the help of an automated revenue operations platform, these risks can be mitigated.

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There are specific steps a business needs to take when implementing variable pricing. First, it’s essential to collect data and conduct specific data analysis. A good customer relationship management (CRM) platform can help with this.

For example, think of a coffee shop. Data analysis can tell you things like when most people buy their coffee — and no surprise, it’s in the morning. That’s great, but then you need to investigate a little bit further and analyse customer behaviour, certain purchasing patterns, and the willingness of the customer to pay a certain price at a specific time of day.

Here are the steps to take:

• Conduct A/B testing: A/B testing is when you compare two or more versions of content to determine which one performs better. For example, if a coffee shop wants to find the sweet spot for the price of their Brazilian blend, they’d compare different pricing models with a test group and see which one performed better. For a variable pricing approach to work successfully, it needs to be automated — dynamically adjusting the price based on different scenarios or customer needs.
• Review AI insights: An AI-powered CRM can be incredibly useful to predict and gain insights on usage history, buying patterns, and industry trends. The analytic capabilities of AI provide detailed customer insights that can be used to give very good input into pricing strategies. It can also help predict what customers will buy next based on their purchase history.
• Apply automation: With clearly defined customer segments, AI can apply automation to pricing models. For example, if a customer buys a specific coffee with a certain flavour, they will likely buy it again — and AI can offer predictions about the person’s future purchasing activity. This can be done by creating a smart list based on a customer purchase history and desired attributes. That triggers a workflow to send customers a personalised email offering a discount tailored to their buying patterns.

Here are some examples of variable pricing in action:

Before the 1990s, European air travel was heavily regulated, with high prices and limited routes. The EU’s Open Skies policy deregulated the market, allowing airlines to set prices freely and encouraging competition. Today, carriers like Ryanair and easyJet use variable pricing to adjust ticket costs based on demand, booking timing, and seasonality. For instance, a flight from Paris to Rome booked early might be inexpensive, while a last-minute ticket during a holiday weekend could cost much more.

Hotels have always used variable pricing, adjusting their rates depending on the time of year. During the high season — the time of year when a travel destination is at its busiest — resorts charge a premium. During off-peak times, hotels may offer special deals to attract customers. Hotels may also lower their rates as a given check-in date approaches to fill vacant rooms.

Ride-sharing apps were the first industries to really take advantage of technology in its use of variable pricing. Using algorithms, apps monitor demand for drivers in real time. During busy times — think rush hours, special events, and bad weather — ride-sharing apps increase fares. When demand is low, the app lowers fares to attract more riders.

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Larger online retailers also use algorithms to adjust prices continuously based on competitor pricing, inventory levels, and customer browsing behaviours. Retailers can also make time-sensitive pricing adjustments, such as selling holiday decorations at a premium during the peak season — and then marking prices down after the holiday has passed.

Ticket brokers use variable pricing to optimise the prices of tickets that they buy and resell. For popular events such as exclusive concerts or arch-rival football games, resellers can charge a premium. They determine pricing by keeping an eye on how quickly tickets sell out, the popularity of the performer or team, or the size of the venue. And if the event isn’t selling well, resellers may lower prices to attract buyers.

Anyone who has had to pay an electric bill during the summer is familiar with variable pricing. Electricity prices are higher during peak hours when demand is high, and lower during off-peak times. Before flat-rate plans became ubiquitous for mobile phones, phone companies used a variable pricing model. They would charge a premium for long-distance calls during work hours and offer a discount after 5 pm.

Depending on supply and demand, manufacturers can adjust the price of their products. For example, if there’s an unusual rise in the cost of goods, labour, or transportation, manufacturers can temporarily increase the price of their products. When conditions return to normal, those companies can return to their usual pricing — or even offer a short-term discount to customers as a gesture of goodwill.

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Variable pricing offers businesses a powerful way to stay agile in a competitive market. Along with the support of AI-driven insights, this pricing strategy can create personalised experiences that foster loyalty and optimise profits. By embracing variable pricing, you can nimbly adapt to market demands, build deeper customer relationships, and ensure long-term success for your business.

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