What is flexible pricing?
Flexible pricing is one of the pricing techniques that may be used when establishing prices for products and services. In the case of flexible pricing, a final price is negotiable, indicating that sellers and customers may debate prices in order to cut or raise the initial price.
Yet, in the majority of instances, it is advantageous for management to mimic demand and raise prices or decrease prices to improve profit or sales, respectively.
This pricing method enables businesses to set varying prices for the same product based on the client. Prices might vary based on either a negotiated agreement or the seller’s subjective opinion. Additionally, a product’s pricing may vary in various geographic regions.
Strategy can be implemented concerning
When we travel, we all compare the pricing in our own nation to those in other countries, and we often notice a difference. The flexible pricing approach is behind this occurrence, which you must recognize.
Prices vary by nation, and in certain cases, by area within a country. Additionally, dealers establish pricing according to a sector. For instance, in raw material industries, the price of iron will be cheaper when supplied to the steel sector than to a maker of bicycle chains.
When evaluating the perceived value of an item or service, sellers might reduce the price of an expensive product or raise the price of a product they believe to be useful to customers. Obviously, these choices are founded on extensive market study and analysis.
In addition, there is flexibility for price adjustments when sellers are in a position to minimize expenditures that do not provide value to a certain customer. By default, a flower shop’s per-arrangement pricing includes delivery. In the event that the customer insists on picking up the flower arrangement in person, the firm might reduce the final price.
When a manufacturer implements technological solutions or enhances existing ones to enhance the manufacturing process, the production costs will rise, which will have an effect on the final pricing.
In this situation, price modifications are decided by vendors. Especially when there is a substantial time lag between the manufacturing and delivery of a product and the whole process improves in the meantime, customers should be aware of the possibility of price volatility.
Examples Of flexible pricing
1. In custom-made sectors and highly competitive marketplaces, flexible pricing is typical. Companies that offer perishable items, household appliances, automobiles, hotels, and building materials are often amenable to price negotiations.
2. The price may be negotiated if a consumer requests a service from a hairdresser that has never been formally provided, and therefore its price has never been established.
The hairstylist intends to charge more for unique demands, however customers’ pricing perceptions are based on their present industry expertise. In the case of carpenter’s services, customers are paid depending on the amount of customization they require, but they are also free to recommend a price based on their budget.
3. Another example is the building business owing to the bidding process for projects. When businesses submit bids for a project, they are unaware of their rivals’ proposals. Simultaneously, each firm seeks to provide a competitive price, get the contract, and reap the greatest potential profit.
4. You should be aware that underlying last-minute discounts is a flexible pricing approach while considering them. Since it is impossible to sell tickets on an aircraft that has already departed, last-minute trips are considered perishable products. As a result, the price of empty tickets is dramatically reduced days or even hours before a departure in an effort to boost sales.
Benefits and downsides of flexible pricing
The primary benefit of this technique is that it enables customers to pay just for what they need. From the client’s viewpoint, this method optimizes value as a result of the ability to cut expenses that add no value and establish rates for the customization of a service or product based on the client’s request.
On the other hand, sellers are free to modify pricing depending on market forces and customer demand while attempting to boost sales and profits. When a customer cannot afford a product or service at its initial price, a seller might retain the transaction by reducing the price, rather than allowing the client to purchase from a rival.
When sellers are able to use the flexible pricing approach, they may raise rates for customers who are prepared to pay more, resulting in an increase in profit.
In general, this method is advantageous if applied properly; nevertheless, some merchants, such as those who offer perishable items, may gain tremendously from it. We all see at retail establishments that as the expiry date approaches, prices decrease and lower prices promote sales.
In addition to the evident benefits that this technique provides to both the seller and the buyer, it also includes a number of downsides. Companies that employ flexible pricing should be wary about their reputation.
Customers may get dissatisfied if they are charged differentially for the same item. Others who were overcharged may feel cheated, while those who were priced less may doubt the quality of the goods.
Every customer might feel cheated if they discover inconsistent pricing. Price fluctuations may have a detrimental impact on a company’s reputation, resulting in the loss of loyal customers and revenue.
There is a danger of profit loss if sales employees lack proper bargaining training or if decreasing prices becomes a habit. If a business chooses to modify its pricing strategy and cease changing rates for customers that anticipate price flexibility as a matter of course, it may be dangerous.
Flexible Pricing Strategy
Developing a pricing plan might be one of the most difficult jobs a company must do. Prices must be set sufficiently high to cover product expenses and generate a profit for the company. However, the pricing must be within the range of what clients are prepared to spend.
A flexible pricing strategy enables a company to swiftly modify prices as needed to adapt to a changing business environment or to overcome competitive obstacles. A flexible pricing approach also allows consumers to negotiate prices depending on the size of their businesses or their purchasing power.
Analyze the Competition
Visit your rivals’ websites and retail outlets. Observe the pricing at which comparable items are being sold. If your competitor’s price structure is not published on their website, consult with other industry members to learn more about it.
Is the competition a low-cost market leader with a reputation for superior service? Understanding how your rivals position themselves in relation to your firm can assist you in formulating a flexible pricing plan. For future reference and monitoring throughout the year, document the price tendencies of your competitors.
Determine Product Costs
To implement a flexible pricing strategy, a corporation must first comprehend product prices and associated selling and administrative expenditures. The cost of producing and selling a product is calculated by adding the costs of materials, manufacturing, overhead, and selling.
Determine Pricing Objectives
Establishing the most flexible pricing plan for your organization has an effect on the firm’s total revenue. Utilize the company goals to determine your annual profit goal. The amount of markup necessary to satisfy the business’s profit aim may be determined by the required profit margin.
Calculate an initial markup % by combining operational expenditures, reductions, and profits and dividing by the projected net sales and reductions. Inventory changes, staff and customer discounts should be included in the reductions.
Utilize the markup % to establish a starting price. Examine volume and profit projections to see whether the predicted pricing yields the necessary profitability for the firm. Compare the price demanded by the company to that of its competitors.
Utilize the original product pricing to establish a flexible selling price range that generates the appropriate profit margins for the firm while accommodating various consumer buying circumstances. Consumers who purchase big quantities of a product, for example, may get a 10 percent discount off the price paid by customers who purchase smaller amounts.
Customers like flexible pricing
Customers like flexible pricing structures. When we have the ability to affect costs, we may find what we want at a reasonable cost. In lieu of a binary decision, i.e., purchase or don’t buy, there is a third alternative. Alternately, you might attempt to negotiate a lower price.
Flexible pricing – sellers
Flexible pricing is favored by sellers if it results in increased revenue. There are certain firms that get huge benefits from this approach.
For suppliers of perishable commodities, pricing flexibility might be very useful. Perishable commodities are items that cannot be sold for an extended period of time because they decompose, become dangerous, or vanish.
For example, airplane tickets for a trip that departs in two hours are perishable products. After takeoff, they are no longer for sale.
If airline personnel are able to bargain directly with customers, the corporation is more likely to sell those empty tickets. In other words, a price approach that is flexible helps to sell last-minute tickets.
Regarding the advantages of pricing flexibility, Living Economics states:
“The promise for a more efficient marketplace is suddenly realizable due to flexible pricing.”
“Buyers can more readily discover a price at which they are willing and able to purchase when prices are allowed to fluctuate frequently in response to supply and demand shifts at little expense.”
Pricing strategies are procedures used by businesses to offer the greatest number of things at the most acceptable price. Generally, flexible pricing suggests that a corporation is willing to negotiate prices for its products and services.
This method is used by both buyers and sellers in order to get the lowest possible price, allowing them to acquire more products or save money.
Flexible pricing in economics refers to a method by which an open market may modify the price of products or services to compensate for short- or long-term product shortages or surpluses. This pricing strategy may be used to illustrate the supply and demand of particular economic activity.
Some businesses have flexible pricing in mind from the beginning of their operations. For instance, vendors of big appliances and automobile dealers often have some pricing flexibility.
In order to maximize sales, it is typical practice in these businesses to negotiate with customers. The primary objective of such pricing schemes is to maximize product sales in a fiercely competitive market.