Whether it’s dynamic pricing or variable pricing, understanding the importance of right pricing strategy is undeniable in a competitive marketplace. According to research by McKinsey & Company, a 1% price increase can lead to an 8.7% boost in operating profits. Yet the harsh reality is that 30% of all pricing decisions never achieve the optimal pricing.
Knowing that perfect pricing strategy can make or break a company, organizations are opting for various pricing strategies to identify the “best” options. Two pricing strategies that have gained significant attention are dynamic pricing and variable pricing. While they may seem similar at first glance, there are important differences between the two that retailers need to understand in order to make informed decisions about their pricing strategies.
In this blog, let us dive deep into the key differences between variable pricing vs. dynamic pricing.
What is dynamic pricing?
Dynamic pricing refers to a pricing strategy where the price of a product or service is adjusted in real time based on various factors such as supply and demand, supply, competition, and customer behavior. The goal of dynamic pricing is to optimize revenue by charging customers the maximum price they are willing to pay for a product or service.
Back in the day, auctions were a top example of dynamic pricing. If someone bids for an item you want to buy, the price could double fast. But now, with the internet, online businesses can change their prices even faster than ever before.
One of the key features of dynamic pricing is its ability to respond quickly in real-time to changes in the market. Through the use of advanced algorithms and data analytics, businesses can monitor market conditions and competitor’s pricing strategies and adjust prices accordingly. This flexibility allows businesses to take advantage of peak demand periods and maximize their profits.
Dynamic pricing has gained significant popularity in recent years, especially among ride-sharing platforms like Uber, airlines and e-commerce industries. Online retailers like Amazon often use dynamic pricing to adjust prices based on factors such as customer browsing history, time of day, competitor prices, etc. By analyzing this data, retailers can offer personalized pricing to individual customers, increasing the chances of making a sale. Check out more examples of popular industries using dynamic pricing strategies to boost their bottom line.
What is variable pricing?
Variable pricing, on the other hand, involves setting different prices for different customer segments or groups. The pricing structure is usually predetermined, and customers are assigned to specific segments based on criteria such as demographics, or loyalty status.
Segmenting customers and offering different prices is a strategic approach that businesses use to cater to the unique needs and preferences of each segment. This allows them to create targeted pricing strategies that maximize the value they provide to customers while optimizing their own profitability.
For instance, a retailer in Bangalore may offer local customers free delivery, while a more distant customer has to pay a slightly higher price to account for shipping costs. Moreover, loyalty programs often reward customers with discounts applied uniformly across the platform, ensuring fairness and consistency in variable pricing practices.
Let’s take a closer look at how variable pricing can be implemented in various industries:
Travel and Hospitality: Variable pricing is also prevalent in the travel and hotel industry. Airlines, for instance, often have different fare classes with varying prices and benefits. Business travelers may be willing to pay a higher price for flexible tickets that allow changes or cancellations, while leisure travelers may opt for lower-priced tickets with more restrictions.
Technology: In the technology sector, variable pricing can be seen in software licensing models. Companies may offer different pricing tiers based on the features and capabilities of the software. For example, a basic version of a productivity tool may be available for free, while a premium version with advanced features may require a subscription fee.
Subscription Services: Many subscription-based businesses utilize variable pricing to offer different levels of service to their customers. Streaming platforms, for instance, may have different subscription plans with varying prices and access to content. Customers can choose the plan that best suits their needs and budget.
Note: Variable pricing can be risky, as it can cause customers to feel alienated if they perceive the prices as too high. However, when done properly, it can help businesses optimize their profits while providing customers valuable products and services.
Comparing dynamic pricing vs variable pricing
While both dynamic pricing and variable pricing aim to maximize revenue, they differ in their approach and execution. Dynamic pricing is primarily focused on adjusting prices in real-time based on market conditions, whereas variable pricing is focused on setting different prices for different customer segments.
Another key difference is the level of control businesses have over the pricing strategy. With dynamic pricing, businesses have more flexibility to respond to changing market conditions and adjust prices accordingly. Variable pricing, on the other hand, requires businesses to predefine their pricing structure and customer segments. Here is a detailed comparison of dynamic pricing vs variable pricing:
| Parameter | Variable Pricing | Dynamic Pricing |
|---|---|---|
|
Definition |
Prices are set in a flexible manner before the product is offered. However, they don't change in real-time. |
Prices adjust in real-time based on various dynamic factors. |
|
Basis for Change |
Prices adjust based on expected factors such as seasonal demand, marketing promotions, or the introduction of new products. |
Prices adjust according to real-time data analytics, like current demand, inventory levels, and competitor prices. |
|
Data Types Used |
Primarily uses internal company data such as sales history, stock levels, and seasonality patterns. |
Uses both internal company data and external data, like online prices, competitor pricing, and market trends. |
|
Frequency of Change |
Less frequent. Prices remain static for set periods or until the next planned review. |
Highly frequent. Prices can change multiple times a day or even within an hour, depending on real-time data inputs. |
|
Tools to Collect Data |
Relies on internal company documents and databases.
|
Employs advanced tools like web scraping, APIs, and other real-time data collection methods. |
|
Implementation |
Straightforward to implement, though it may require more manual oversight. |
Requires sophisticated software, advanced algorithms, and consistent input of real-time data for effective implementation. |
|
Examples |
Hotels may increase rates during peak seasons. Software products might have a discounted introductory price. |
Airline ticket prices that vary according to current demand or e-commerce platforms that adjust prices based on competitor actions. |
Business value of dynamic and variable pricing
Both dynamic pricing and variable pricing offer unique benefits to businesses. Dynamic pricing allows businesses to maximize revenue by adjusting prices to match high demand in real time. This can result in increased profitability and improved resource allocation. On the other hand, variable pricing helps businesses cater to different customer segments and create tailored pricing strategies that enhance customer satisfaction and loyalty.
Additionally, both strategies rely on data analysis and advanced technology to make informed pricing decisions. By leveraging data and analytics, businesses can gain valuable insights into customer behavior and preferences, leading to more effective pricing strategies.
Which one should you choose?
Use of dynamic and variable pricing strategies can greatly benefit businesses depending on their industry, available data, and the ability to adjust prices. Dynamic pricing strategy relies on real time data to set prices, making it a good option for established companies with access to that data. Whereas variable pricing is better suited for startups, who need to penetrate the market quickly and are more concerned with sales volume than immediate profits. However, combining different pricing strategies to achieve optimal revenue targets is best. For this, businesses must understand the differences between variable vs. dynamic pricing and find the sweet spot between delivering value and maximizing profits from their prices.
Pricing strategies can be complex and difficult to implement effectively. To simplify the process, businesses need a reliable platform to manage dynamic and variable pricing while providing valuable insights. With the right tools, businesses can ensure they are making well-informed decisions about pricing that will help optimize their profits.
Unlock the full potential of your business's pricing strategy with Flipkart Commerce Cloud
FCC’s retail media solution is designed for maximum versatility, allowing online retailers, omnichannel brands, and businesses to get a tailored experience. Through a combination of human expertise and data-driven insights, we offer a partnership that goes beyond just a software platform.
Our pricing software uses a combination of proprietary machine-learning algorithms and game theory approaches to help you implement goal-driven pricing.
Additionally, our robust competitor intelligence platform provides invaluable insights when it comes to making strategic decisions for your brand.
Transform your pricing strategy with FCC and take a dynamic approach to goal-driven and elasticity-based pricing for your entire portfolio, from specific categories or product lines to national markets and world regions. Talk to our pricing experts today!