Flexible pricing

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Flexible pricing
See also

Flexible pricing means prices that respond, if not immediately, at least readily to changes in the demand for some product or the economic cost of producing it. A price is flexible if, in response to an abrupt increase in demand, it rises to allocate and ration the available supply at a market clearing price. A price is flexible if, in response to a cost reduction, it drops to reflect the lower value of the resources used in producing the good. Price flexibility is not only a desirable property of a market economy; it is a necessary property[1].

Flexible pricing seeks to establish a stable and acceptable equilibrium between the supply and demand for services. The pricing rates do not necessarily bear any relationship to costs. Rates may be set to recover total costs or to recover costs plus a profit. Thus, flexible pricing may be used with either the cost center or profit center approach. The primary disadvantages of flexible pricing is that it can be costly to administer, because prices may have to be changed frequently to accommodate changes in user behaviour.

Flexible pricing tends to be a management tool for managing service centers and motivating users to efficiently use capacity. Consequently, it is not an acceptable approach for costing government contracts[2].

Flexible price strategy

Under a flexible price strategy, similar customers may pay different prices when buying identical quantities of a product. With flexible prices, buyer-seller bargaining often determines the final price. This practice is also called variable price policy.

The biggest advantage of flexible price strategy is that seller can have flexibility in dealing with different customers. Certain valuable customers can be offered a lower price. Flexible pricing policy also enables a company to attract customers of other competitors, and thus new business can be acquired. When the size of the transaction is large, price should be negotiable, i.e., subject to bargaining. This policy is more prevalent in industrial buying. Certain credit card companies also offer lesser rates of interest to customers who transfer their outstandings from other credit card companies to their companies[3].

Types of dynamic pricing model

The Internet market has increased opportunities to improve their network by using another form of flexible pricing known as dynamic pricing. Dynamic pricing is defined as flexible pricing between supplier and buyer in response to supply and demand at any given time. The price changes as the supply and demand in the market change. Dynamic pricing is usually used when there is uncertainty about the price, demand and supply of the service.

Types of dynamic pricing model[4]:

  • Auctions
  • Reverse auctions
  • Quality pricing
  • Pricing matching
  • Group pricing
  • Trading exchanges

Footnotes

  1. P. Dunne, R. Lusch 2010, p.333
  2. L.K. Anderson 2019, p.44
  3. K. Vashisht 2005, p.172
  4. Ch. Voudouris 2010, p.243

References

Author: Natalia Węgrzyn