Understanding Variable Pricing
When it comes to winning business in competitive markets, fortune favors the flexible. As mercurial factors such as consumer demand, purchase volumes and market pricing fluctuate, it’s only natural that price moves to meet the customer or situation.
It’s like the story of Goldilocks and the Three Bears: if you try just one single price in a market, it'll be too hot for some, too cold for others — only for those select few Baby Bear customers will it be just right. Sticking to one price for all your customers means missing out on valuable business from Mommy Bear and Daddy Bear.
Instead, allowing for a bit of flexibility in your pricing strategy allows you to make the most out of a marketplace. This is where variable pricing comes in, allowing you to win business in competitive situations without disrupting your overall pricing strategy.
What is Variable Pricing?
Though the scale and scope can vary between industries, the basic concept behind variable pricing remains the same. End customers buy products at different prices based on their consumption dynamics. Variable pricing refers to the strategy of adjusting prices for different purchase volumes, customer segments, regional markets, account sizes or other factors. In simple terms, the customer buying 10,000 units per year should get a better price than the customer buying only 10 units
Why is Variable Pricing Important?
The backbone of most successful companies is built on price distinction for different aspects of a business. Most companies have a customer base that consumes product in different ways, with some products being more popular than others. It is rare to find a B2B setting where all customers purchase the same products at similar rates. There are many different scales of customers, from restaurants and hospitals to industrial facilities, each with different purchasing volumes. Generally, the ability to buy in bulk translates to greater pricing power, meaning that businesses must modify their pricing strategies to attract larger accounts.
In retail, price distinction is often thought of as less important – but if Microsoft is selling a license to every government office in a country, the price will be different than when they sell to individual homeowners. Only truly flat demand customer bases can get away with maintaining a single price. For example, Netflix might sell their service to every home in the US at the same price – but even Netflix uses variable pricing to enter global markets. Every business (with very few exceptions) uses variable pricing based on the scale of their customer base.
Finding the Optimal Price Point
Ultimately, price is determined by market dynamics including competition, logistics, demand patterns and market aspirations. What each business considers “optimal” depends on what it wants to achieve: are you focused on revenue, operations, profitability or growth? Whatever your strategy or goals may be, pricing is always a delicate balancing act. If you set your price low enough, you could win every sale – but then you probably wouldn’t make a profit. That’s why it’s essential to find your business’s unique balance and compromise level.
Customers buy products for many reasons: function, convenience, availability, support, service, familiarity and so on. Price is just one of those factors. We don’t always go with the cheapest option in every product range: just look at the multitude of factors that weigh into our decision when buying a car.
Optimal pricing is about understanding how price fits into the customer's hierarchy of needs and meeting those needs accordingly. On smaller, less frequent transactions, we typically care less about price – but on high-value, recurring transactions, it becomes a much more significant factor. By analyzing the demand patterns for your products, you can identify which items are more price-sensitive and which are less so for any given situation.
Overcoming Variable Pricing Challenges
Variable pricing based on customer demand is necessary in every B2B channel, serving as a valuable tool in market strategy. However, implementing this strategic practice can be challenging for a few reasons:
Adjusting Stock Pricing After the Sale
Variable pricing is simpler when you sell direct, but selling through distribution complicates this process. Distributors typically bring in a product at one price, so the adjustment must happen after the product is sold to the final customer. There are some ways around this, such as consigned inventory or special orders going to the distributor for each customer – but ultimately, you need a stock pricing adjustment after the final sale. This is the backbone of the special pricing agreement (or SPA) process.
Preserving Distributors’ Margins
Another challenge when selling through distribution is that the distributor may need to reduce their margin to sell the product at a discount. Reducing your distribution partners’ margins is likely to do more harm than good; however, some businesses use special pricing agreements to avoid this and preserve distributors’ margins.
Specific Pricing and On-Demand Supply
To streamline the order fulfilment process, it's important to make it as easy and low-cost as possible. Some customers purchasing large volumes of product may prefer to avoid the trouble of storing it themselves, instead opting for an on-demand supply through local inventory. However, supporting multiple prices through local inventory requires additional steps such as special orders, consigned inventory or special shipments, which can delay this critical process.
This is yet another area where SPAs excel: as a way to adjust the stock price of an item for a distributor after it is sold to a customer. In this way, SPAs allow businesses to use targeted pricing without extra operational steps.
Using SPAs to Support Your Variable Pricing Strategy
Despite their reputation for complexity, special pricing agreements are by far the easiest and most effective way to support a targeted customer variable pricing strategy through distribution. In my next blog, I’ll explore this mechanism in detail and reveal how you can use SPAs to support a successful variable pricing strategy. Read it here.