Fixed or Flexible Pricing? That Is A Question

Vegetable marketFrom a reader:
Dear Mark,
Currently, I carrying out a graduation project for a company in Ethiopia. The graduation project is the final part of my study BSc. Business Engineering which I follow at the Utrecht University of Applied Science (the Netherlands).
The pricing strategy of the products of our company (mainly fresh vegetables) is a main subject of this project. I find out if it is possible to use a fixed price for our products. My question for you is:
1. can you provide some scientific information about the flexible/fixed price topic?
2. what are your opinion necessary conditions for handling a fixed price?
I am looking forward to your response. If you require any further information, feel free to contact me..
Thank you in advance
Yours sincerely,
Harro

Hi Harro,

I’m not aware of any experiments or empirical data on fixed vs. flexible pricing.

I’m typically a strong proponent of flexible pricing. This makes sense because pricing is about charging customers what they are willing to pay, and different customers have different willingness to pay. That said, when would fixed pricing make sense?

When there is price transparency. In other words, everyone knows what someone else paid. Some companies who sell to government agencies face this because the information is available to the public. Not many other industries have this.

When there are many low value transactions. When you go to the grocery store, you don’t haggle prices over a bag of potato chips. You either buy them or not. In this case, the cost of paying trained salespeople to negotiate over little items exceeds what little additional gross profit we might make with flexible pricing.

When your competition does it. If everyone expects you to negotiate and you don’t, your customers will leave you and go to your competitors. To succeed without negotiating in these markets you would need a new and compelling business model.

Most B2C (Business to Consumer) business is done without negotiating. In fact there are very few examples where consumers negotiate here in the US. That’s not true around the world though.

The above are examples of when we don’t negotiate prices, but it doesn’t mean we always charge the same customer the same price. So what is your definition of flexible? In your case, selling fresh vegetables, I wouldn’t negotiate every transaction, but I would be flexible.  Here are two techniques to consider.

First, do you offer a volume discount? The more someone buys, the bigger the discount.

Second, you may want a different price on vegetables that are “ripe today” vs. “ripe tomorrow” vs. “ripe yesterday”. I would assume the “ripe yesterday” would be least expensive, but it lets you move the product while still serving those with very low willingness to pay.

It’s likely there are other techniques for you as well. Think about when customers are willing to pay more and what differentiates that situation.

Harro, if your definition of flexible means negotiate every deal, that gets challenging, as you can see by the examples above. However, even if you don’t negotiate every deal, you can have a set price list for different situations that truly captures more of your customers willingness to pay.

Hope that helps.

Cheers,
Mark

 

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