Flexible pricing enables price segmentation. If you can learn a customer’s willingness to pay (WTP), flexible pricing allows you to charge closer to that amount. Some customers pay more and some pay less.
Flexible pricing really means your willingness to negotiate. Car dealerships carefully study their customers. What are they wearing? What is their current car? What is their career? They use this information and more to estimate their customers WTP and then negotiate the highest price possible.
Look at what happens if you only charge a single fixed price. You could price high enough to capture the full value from customers with high WTP, but you would not sell to those with lower WTP. You could price low enough to capture the most customers, but you leave money on the table because some people were willing to pay much more.
Given a choice you want to use flexible pricing. What conditions drive you to fixed pricing then?
Low value transactions: When you buy a bag of chips at the grocery, you don’t negotiate. That’s because it isn’t worth the effort to the grocer (or you). The cost of negotiating is likely higher than any incremental WTP you capture.
Capability of sales channel: If your sales channel is not structured or trained to negotiate deals, then fixed pricing may be a better choice. For example, it is difficult to negotiate individual deals when selling through a distributor. However, the power of some buyers, like WalMart, could force you into negotiations even if you don’t really want to negotiate.
Capacity for new business: If your factory is at full capacity or your organization can’t expand more without extensive hiring and training, then negotiating lower prices makes little sense. However, if you really are at capacity, can you raise your prices for new customers? Then as capacity becomes available you can offer your current (lower) prices to keep at full capacity.
Should you use fixed or flexible pricing? Look at your situation. If flexible pricing makes sense, use it. If not, use fixed pricing. We presented 3 reasons why you would want to use fixed pricing, but surely there are more. Can you think of any? Please share them.
Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author
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Graphic courtesy of city cigar life.