How to Use Variable Pricing Strategy to Boost Your E-commerce Sales
Variable pricing is a strategy that allows you to adjust your product prices based on the current levels of supply and demand, location, customer segments, and other factors. It can help you optimize your profit, attract more customers, and stay ahead of the competition. In this article, you will learn what variable pricing is, how it works, what its advantages and disadvantages are, and how to implement it successfully on your e-commerce store.
Key Takeaways
Variable pricing is a strategy that allows you to adjust your product prices based on the current levels of supply and demand, location, customer segments, and other factors.
Variable pricing can help you optimize your profit, attract more customers, and stay ahead of the competition.
Variable pricing can also frustrate customers, increase competition, impact customer loyalty, and backfire on sales.
To implement variable pricing successfully, you need to do your research, use data and technology, test and experiment, and communicate your value.
What is Variable Pricing?
Variable pricing is a method that implies adjusting a product’s price depending on the current levels of supply and demand. This approach applies well to the e-commerce industry because it is easy to obtain the information about prices on the market and change rates on the go.
Variable pricing follows specific business cycles and depends on certain aspects like seasons. For example, the demand for air conditioners is higher in summer than in winter, so you can charge more for them during the hot season.
Also, variable pricing means that a business offers different rates in different locations or points of sale. For example, you can sell online cheaper than in brick-and-mortar stores. Pricing in different countries and regions also varies – this is a common strategy among international retailers.
The key point of variable pricing strategies is to maximize sales and profit by delivering optimal prices for specific market segments. However, this approach should be applied carefully so as not to frustrate customers because some of them may deem it unfair .
Examples of Variable Pricing
Variable pricing is widely used in the e-commerce industry, so here are some examples from the most prominent marketplaces.
eBay uses the auction method
it sells items with a limited supply. When an auction is launched, the demand for the product skyrockets, pushing the price up. It allows eBay to maximize revenue and satisfy customers who get the chance to buy an exclusive product.
Amazon often experiments with varying rates and changes prices 2.5 million times a day! Smart algorithms calculate the best rates for consumers based on a multitude of factors, including demand and consumer behavior, inventory level, competitors’ pricing, market trends, and so on .
Uber uses surge pricing
it increases the price of rides when the demand is high or the supply is low. For example, during peak hours, bad weather, or special events. This way, Uber encourages more drivers to join the platform and balance the demand and supply .
Model of Variable Pricing
There are different ways to implement variable pricing on your e-commerce store. Here are some common models that you can use:
Variable Pricing Based on Demand
You can adjust your prices according to the fluctuations in demand for your products. For example, you can increase your prices when the demand is high or decrease them when the demand is low. This way, you can capture more value from your customers and avoid losing sales due to overpricing or underpricing .
Variable Pricing Based on Location
You can offer different prices for different regions or countries based on the differences in purchasing power, taxes, shipping costs, competition, and customer preferences. For example, you can charge more for your products in developed countries than in developing ones .
Variable Pricing Based on Groups
You can segment your customers into different groups based on their characteristics or behavior and offer them different prices accordingly. For example, you can offer discounts to loyal customers, students, seniors, or first-time buyers .
Advantages of Variable Pricing
Variable pricing has many benefits for your e-commerce business. Here are some of them:
It Boosts Profit
By adjusting your prices according to the market conditions and customer segments, you can increase your profit margin and revenue. You can also avoid leaving money on the table by charging too little or losing sales by charging too much.
It Helps to Attract Customers
By offering different prices for different customers, you can appeal to a wider audience and increase your customer base. You can also create a sense of urgency and exclusivity by using dynamic pricing techniques like auctions or surge pricing .
It Helps to Stay Competitive
By monitoring your competitors’ prices and changing yours accordingly, you can stay ahead of the game and gain a competitive edge. You can also differentiate yourself from your rivals by offering unique value propositions or personalized offers .
Disadvantages of Variable Pricing
Variable pricing also has some drawbacks that you should be aware of. Here are some of them:
It Can Frustrate Customers
Some customers may not like variable pricing because they may feel that it is unfair or deceptive. They may also compare prices across different channels or platforms and feel cheated if they find out that they paid more than others .
It Can Increase Competition
By using variable pricing, you may attract more competitors who want to undercut your prices or match them. You may also face price wars that can erode your profit margin and brand image.
It Can Impact Customer Loyalty
By changing your prices frequently, you may lose the trust and loyalty of your customers who may perceive you as unreliable or inconsistent. You may also lose repeat customers who may switch to other sellers who offer more stable or lower prices .
It Can Backfire on Sales
By increasing your prices too much or too often, you may discourage customers from buying your products or make them wait for lower prices. You may also lose sales opportunities if you lower your prices too much or too soon .
How to Implement Variable Pricing Successfully
To use variable pricing effectively, you need to follow some best practices and tips. Here are some of them:
Do Your Research
Before setting your prices, you need to do your market research and analyze the factors that affect the demand and supply of your products, such as seasonality, trends, customer behavior, competitors’ pricing, etc. You also need to know your costs and profit goals .
Use Data and Technology
To adjust your prices dynamically and accurately, you need to use data and technology. You can use tools like price intelligence software, price optimization software, or dynamic pricing software that can help you collect and analyze data, monitor competitors’ prices, and automate price changes.
Test and Experiment
To find the optimal prices for your products and customers, you need to test and experiment with different pricing strategies and models. You can use methods like A/B testing, multivariate testing, or split testing to compare the results of different prices and see what works best.
Communicate Your Value
To justify your prices and avoid customer backlash, you need to communicate your value proposition clearly and transparently. You need to explain why your prices vary and how they benefit your customers. You also need to provide value-added services or features that can enhance your products’ appeal .
Tips
- Use variable pricing when the demand for your products is elastic or sensitive to price changes.
- Use variable pricing when the supply of your products is limited or scarce.
- Use variable pricing when you have a clear competitive advantage or differentiation over your rivals.
- Use variable pricing when you can segment your customers into different groups based on their willingness to pay or preferences.
- Use variable pricing when you can monitor and respond to market changes quickly and efficiently.
Variable Pricing Strategy and Global Demand
Variable pricing strategy is a marketing approach that allows businesses to offer different prices for the same product or service depending on various factors, such as demand, location, time, customer segment, etc. This strategy can help businesses to optimize their profit, sales, and customer satisfaction by delivering optimal prices for specific market segments. However, this strategy also has some drawbacks, such as customer dissatisfaction, increased competition, reduced loyalty, and possible negative effects on sales.
How Variable Pricing Strategy Affects Global Demand
Global demand is the total amount of goods and services that consumers around the world want to buy at a given price level. Global demand can be influenced by many factors, such as income, preferences, expectations, population, exchange rates, etc. Variable pricing strategy can affect global demand in different ways, depending on how it is implemented and what factors are considered.
One way that variable pricing strategy can affect global demand is by adjusting prices according to the demand level in different regions or countries. For example, an e-commerce business can sell its products cheaper online than in physical stores, or offer different prices in different countries based on the purchasing power and preferences of the consumers. This can help the business to increase its sales volume and market share in low-demand or low-income regions, while maintaining its profit margin and customer satisfaction in high-demand or high-income regions.
Another way that variable pricing strategy can affect global demand is by changing prices according to the time of the day, week, month, season, or year. For example, an airline or a hotel can charge higher prices during peak hours or seasons when the demand is high, and lower prices during off-peak hours or seasons when the demand is low. This can help the business to maximize its revenue and occupancy rate, while attracting more customers who are willing to pay less during off-peak periods.
A third way that variable pricing strategy can affect global demand is by offering different prices to different customer segments based on their characteristics, behavior, or preferences. For example, an online marketplace can use an auction method to sell items with a limited supply, where the price is determined by the highest bidder. This can help the business to generate more revenue and satisfy customers who want to buy an exclusive product. Alternatively, a business can use a dynamic pricing algorithm to calculate the best price for each customer based on factors such as inventory level, competitors’ pricing, market trends, customer behavior, etc. This can help the business to deliver personalized prices and offers that match the customer’s willingness to pay and increase their loyalty.
Frequently Asked Questions:
Q1: What is variable pricing?
A: Variable pricing is a strategy that allows you to adjust your product prices based on the current levels of supply and demand, location, customer segments, and other factors.
Q2: What are the benefits of variable pricing?
A: Variable pricing can help you optimize your profit, attract more customers, and stay ahead of the competition.
Q3: What are the drawbacks of variable pricing?
A: Variable pricing can frustrate customers, increase competition, impact customer loyalty, and backfire on sales.
Q4: What are some examples of variable pricing?
A: Some examples of variable pricing are auctions, surge pricing, discounts, or regional pricing.
Q5: How to implement variable pricing successfully?
A: To implement variable pricing successfully, you need to do your research, use data and technology, test and experiment, and communicate your value.
References:
http://www.meiss.com/download/RM-Maglaras-Meissner.pdf
https://zenodo.org/record/894118
https://www.yalelawjournal.org/note/amazons-antitrust-paradox
https://priceva.com/blog/variable-pricing
https://www.marketing91.com/variable-pricing/
https://competera.net/resources/glossary/variable-pricing-strategies
https://priceva.com/blog/variable-pricing
https://www.marketing91.com/variable-pricing/
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