Flexible pricing

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.

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.

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.

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:

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

Examples of Flexible pricing

• Dynamic Pricing: Dynamic pricing is a form of flexible pricing where prices are adjusted in real-time based on demand, supply, and other market factors. This type of pricing is common in the airline and hospitality industry, where prices fluctuate according to the number of bookings and the season. For example, airlines may increase prices for flights on popular days or during holidays, while hotels may reduce prices for rooms during slow seasons.
• Discounting: Discounting is a form of flexible pricing that is used to reduce prices temporarily in order to attract more customers or clear excess inventory. This type of pricing is commonly used in retail stores, where items are discounted to encourage customers to purchase them. For example, a store may offer a 10% discount on select items during a promotion or a clearance sale to clear out old inventory.
• Negotiated Pricing: Negotiated pricing is a form of flexible pricing where buyers and sellers negotiate the price of a product or service. This type of pricing is common in business-to-business transactions, where buyers and sellers can agree on a mutually beneficial price for a product or service. For example, a buyer may negotiate a lower price with a supplier for a large order of a specific product.

Advantages of Flexible pricing

• Flexible pricing allows businesses to adjust their prices quickly to changing market conditions, which helps them to remain competitive and maximize profits.
• Flexible pricing can help to keep businesses agile, allowing them to adjust their prices to take advantage of market opportunities.
• Flexible pricing can help businesses to maximize their profits by adjusting the price of their product or service to match the market demand.
• Flexible pricing can help to reduce the risk of losses by allowing businesses to adjust their prices in response to economic changes.
• Flexible pricing can help businesses to better manage their inventory and resources by allowing them to adjust their prices based on demand.
• Flexible pricing also helps to ensure that prices are fair and reasonable, as businesses can adjust their prices to reflect the current market conditions.

Limitations of Flexible pricing

Flexible pricing has several limitations. These include:

• Increased volatility: Flexible pricing can cause prices to fluctuate rapidly in response to market conditions, leading to increased volatility and uncertainty in the market.
• Poor market visibility: When prices are constantly changing, it can be difficult for buyers and sellers to know what the current price is and to accurately assess the value of a good or service. This can lead to confusion and mispricing.
• Inefficient allocation of resources: Flexible pricing can lead to inefficient allocation of resources, as buyers and sellers may not be able to accurately assess the true value of a good or service. This can lead to over - or under-utilization of resources.
• Reduced consumer confidence: Constant fluctuations in prices can lead to reduced consumer confidence, as buyers may be wary of buying a good or service if they feel the price may change drastically in the future.
• Reduced profits: As prices change in response to market conditions, businesses may find it difficult to maintain consistent profits. This can lead to reduced profits and a lack of incentives for businesses to invest in the market.

Other approaches related to Flexible pricing

• Cost-Based Pricing: This approach involves setting a price for goods or services based on the costs incurred in producing them, such as labor, materials, and overhead. It is a way to ensure that the price covers the costs of production while still being competitive in the market.
• Competitive Pricing: This involves setting a price based on what competitors are charging for similar goods or services. This helps ensure that the price is competitive, while still generating a profit.
• Value-Based Pricing: This approach involves setting a price based on the perceived value of the goods or services in the marketplace, rather than on the cost of production. This helps ensure that the price reflects the value of the product or service.
• Dynamic Pricing: This involves setting a price based on current market conditions, such as supply and demand. This allows the price to respond quickly to changes in the market, which can help maximize profits and minimize losses.

In summary, Flexible pricing is a necessary property for a market economy and involves setting prices based on the costs of production, competitive prices, the perceived value of the goods or services, and dynamic conditions in the market.

Footnotes

Flexible pricing — recommended articles

Administered price — Price Maker — Factors affecting pricing — Cost-plus pricing — Price-Taker — Trade discount — Price control — Joint demand — Marginal pricing

References

• Anderson L.K., (2019), Accounting for Government Contracts, LexisNexis, London.
• Dunne P., Lusch R., (2010), Retailing, Cengage Learning, New York.
• Vashisht K., (2005), A Practical Approach to Marketing Management, Atlantic Publishers, New Delhi.
• Voudouris Ch., (2010), Service Chain Management, Springer Science & Business Media, Berlin.

Author: Natalia Węgrzyn