Developing a well-suited pricing strategy is extremely challenging and can earn you a few grey hairs on the way. You need to think about the right price point and how it will impact your customers, along with the overall business. You want to keep or even increase your market share by maximizing your sales, but pricing is not a matter to take lightly, as you can easily scare away your buyers.
A pricing strategy has a huge impact on your bottom line, so it is crucial to consider all the options. But what are they? What makes one better than the other? And how do you decide which pricing strategy will work best for your business?
First, you need to do some research to understand the most common pricing strategies, such as dynamic pricing, price skimming, and penetration pricing. Once you know what’s out there, you can start to evaluate which one will be the most successful for your company.
In this post, we will discuss flexible pricing, what it entails, and how you can use it to your advantage. We will also mention a few of its drawbacks and things you should be aware of before making this decision. Plus, we’ll provide some tips for implementing this model.
What Is Flexible Pricing?
A flexible pricing model is a type of pricing strategy where businesses change the price based on customers, market demand, competition, and other factors. It means that, contrary to the fixed pricing model, the price of a product or service is not set in stone, but rather it fluctuates according to the current market conditions.
For example, imagine you own a hotel near a popular tourist destination. During the high season, you might charge more per night than you do during the low season because there is more demand for rooms. However, if a new hotel pops up in the area and starts undercutting, you may consider lowering prices to stay competitive.
Many factors come into play when setting a price, but with flexible pricing strategies, businesses can adjust their prices on the fly to respond to changes in the market.
Benefits of Flexible Pricing
Flexible pricing comes with numerous advantages, the most significant ones being the following:
- Price negotiation — One of the main benefits of flexible pricing is that it allows businesses to negotiate prices with customers and the other way around. This is because the price is not set in stone, so there is some room for bargaining. It’s especially beneficial when it comes to customizable items or services where the customer can choose different options that will affect the final price.
- Increased sales — With flexible pricing models, businesses can increase their sales by offering discounts and promotions. For example, if a customer is interested in buying a product but is unwilling to pay the full price, the business can offer a discount to sweeten the deal. This way, the customer gets a lower price, and the business makes a sale that it otherwise would have missed out on. It will also allow you to expand your target market.
- Improved cash flow — Businesses can improve their cash flow by offering discounts to buyers who pay upfront. For instance, if a customer pays for a year’s worth of service in advance, the business can offer a 10% discount. This way, the business gets the money it needs now, and the customer gets a lower price.
- Higher profit margins — In some cases, companies can increase their profit margins using pricing flexibility. For example, if a business knows that a customer is willing to pay more for a product, it can charge a higher price and earn a bigger profit. Of course, this needs to be done carefully so that the customer does not feel like they are being taken advantage of.
- Clearing out old inventory — Businesses can also use flexible pricing to get rid of old inventory they are struggling to sell. Offering discounts can entice customers to buy these products, freeing up space for new inventory. It may be especially helpful if you sell perishable goods that need to be sold before they go bad.
Disadvantages of Flexible Pricing
Flexible pricing is not without its drawbacks, and businesses need to be aware of them before making the switch. The disadvantages of flexible pricing include the following:
- Difficulty implementing — One of the biggest challenges of flexible pricing is that it can be difficult to implement. This is because businesses need to have a good understanding of their costs, the market, and their customers. Without this knowledge, it will be hard to set the correct prices.
- Constant monitoring — Once a business has implemented a flexible pricing strategy, it must be prepared to monitor the market constantly and adjust prices based on the relevant information. It can be a time-consuming and expensive process, especially for small businesses.
- Possible customer alienation — If a business is careless, flexible pricing models can alienate its customers, as they might feel like they are being taken advantage of if they see the same product being offered at different prices. To avoid this, businesses need to be transparent about their pricing and explain why the prices for services that are customized as per customer’s requests may vary constantly.
- Financial risks — Flexible pricing models also come with some financial risks, as businesses can end up losing money if they fail to set the right prices. For example, if a business offers a discount that is too steep, it might not make enough profit to cover its costs. Moreover, if their sales representatives don’t have the necessary negotiation skills, they might be unable to get the best prices from buyers.
- Risk to reputation and image — In some cases, a flexible pricing strategy can also damage a business’s reputation and image. Customers who are charged more than others might feel they are being ripped off or that the price doesn’t match the perceived value of a product, while those who are charged less might feel like they are getting a lower-quality product. To avoid this, businesses need to be careful about how and when they use discounts and promotions.
Examples of Flexible Pricing
Flexible pricing is a very popular pricing strategy, and many businesses use it successfully. Here are a few examples:
- Hotels — Hotels often use flexible pricing to adjust their rates according to the season. A hotel by the sea will charge more during the summer than in winter, while a hotel in the mountains will do the opposite.
- Retailers selling perishable goods — Flexible pricing is also popular among retailers selling perishable goods, such as food and flowers. These businesses often offer discounts on goods close to their expiration date to entice customers to buy them.
- Craftspeople — Craftspeople, such as artists and jewelers, often use flexible pricing when selling their products. They might charge different prices for the same product whenever it’s customized or when the materials used in its manufacturing are more expensive.
- Construction companies — Construction companies often use flexible pricing when bidding for projects. They will take into account the costs of materials and labor, as well as the time needed to complete the project, to come up with a price that they think the client will be willing to pay.
- Airlines — Airlines use flexible pricing to sell tickets at different prices, depending on when they are purchased, the time of the flight, and the desired amenities. For instance, a ticket for a flight departing early in the morning may be cheaper than one for a flight departing in the evening if the airline knows that most people prefer to catch a later flight.
How to Implement a Flexible Pricing Strategy
Now that you know what flexible pricing is and what its advantages and disadvantages are, it’s time to learn how to implement it. Here are a few tips:
Do Your Research
The first step is to do your research and understand the market. You need to know your costs, the prices your competitors are charging, and what your customers are willing to pay. Doing so will give you a good starting point for setting your price.
Set Your Goals
When implementing a flexible pricing strategy, it is essential to set goals. What do you want to achieve with this pricing strategy? Do you want to increase sales, improve cash flow, or clear out old inventory? Once you know what your goals are, you can start developing a plan to achieve them.
Test Different Prices
When you have an idea of what prices to charge, the next step is to test different prices and see what works best. You can do this by running promotions or discounts and seeing how customers react before you decide on the final price. It’s especially important in the case of price-sensitive products and services where price changes can make or break the demand.
Train Your Employees
If you are going to be changing your prices often, you need to make sure your employees are on board. They need to be trained on how to implement the new pricing strategy properly. Otherwise, they might make mistakes that could cost you sales.
Communicate With Your Customers
When implementing a flexible pricing strategy, it is crucial to communicate with your buyers. They must know why prices are changing and what factors are being taken into account. Otherwise, they might feel like they are being taken advantage of, as most people are accustomed to one fixed price.
Be careful not to damage your reputation or image. Customers who feel like they are being taken advantage of might not come back, which can hurt your business in the long run.
Monitor the Market
Finally, you must be prepared to monitor the market and adjust the price accordingly. It is a time-consuming process, but it is necessary to ensure a competitive price and realize the potential of a more efficient marketplace.
Contrary to the fixed pricing model, a flexible pricing policy is a type of pricing strategy where businesses change their prices based on a variety of factors, such as customers, supply and demand, or competition. When done right, it can be very successful, but businesses must be careful to maintain their reputation and image.
If you are thinking of implementing flexible pricing models, the first step is to do your research and understand the market forces. You need to know your costs, the prices your competitors are charging, and what your customers are willing to pay. Once you have this information, you can test different prices and see what works best for your business.
This pricing model is not without its risks, but if you are careful and monitor the market closely, you can use it to your advantage.
Manager with experience in leading team of software developers and testers during implementation of internal and external IT projects. Ceo of Brandly360.com.