How Variable Pricing Can Provide Value to Consumers
Understanding the range of prices and one’s own valuation can reap rewards.
Posted Nov 12, 2018
Nowadays, we are used to prices of products and services that fluctuate in a wide range. Because of this variability, people will pay dramatically different amounts of money for the product or service. Some consumers will pay very high prices while others will get a deal. Marketers have a name for this pricing method. They call it “variable pricing.”
From a psychological perspective, what makes variable pricing interesting is that in some cases, consumers are fine with paying different prices and even welcome the variability in prices. At other times, they rise up in outrage and protest. The question is why.
To answer this question, first, we need to understand how variable pricing works. Here are three examples of variable pricing from the airline, retail, and hotel industries.
Airline tickets. It is common to pay a high price for an airline ticket if you purchase it one or two days before the fly date. In contrast, you’ll pay a fraction of the last-minute price if you make the purchase approximately two months in advance. An airline ticket’s price variability also arises from such features as how many pieces of luggage you check in, whether you want a seat with more leg-room, and if you want to board the plane earlier.
Books purchased from an online retailer. It used to be that booksellers changed their prices once or twice a year. That’s no longer the case. Prices of books, like most other products sold online change frequently over a wide range. Consider the variation in the price of a book called Confronting Climate Change over a three-month period on Amazon, shown in the chart below. At its highest level, you’d have had to pay $120 to purchase the book. Just days later, you’d have paid less than $15.
Hotel rooms. Hotels routinely vary prices in response to expected customer demand. When demand is high, or when future sales are brisk, prices are high. During off-peak demand such as In the off-season, prices are low. Consider the following pricing situation:
“The least expensive room rate at the Fairfield Inn & Suites in State College, Pennsylvania, was $499 for November 11, the day when Penn State had a football home game against Rutgers. A day later, for November 12, the rate dropped to $109, according to a check of rates at the hotel’s website.” The same thing happens with hotel room prices during conventions and holidays.
The logic behind variable pricing
While wide price ranges for products can seem disconcerting, the fact is that variable pricing is becoming more common. Even supermarkets and zoos are adopting this pricing method. The reason is that in all these examples of variable pricing, customers either actually receive different levels of value at the high and low price points, or at least they perceive they have received substantially different value. And they have the freedom to choose the option (and price) that corresponds to their respective level of willingness-to-pay.
Returning to the airline ticket example to illustrate this, a business traveler may not be able to plan travel two months in advance. They pay a higher price for the flexibility of buying their airline ticket at the last minute. And buyers of the Confronting Climate Change book can reign in their impatience and wait for the next price dip. Those who are impatient (and insensitive to how much they pay) will buy at the higher price level. Similarly, out-of-town Penn State fans who really want to watch the Penn State home game and can afford it will pay the $499 price and stay at the Fairfield Inn & Suites. Those who are frugal will decide they’ll watch the game on TV instead.
For sellers, variable pricing is so powerful for two reasons. First, it allows customers to naturally self-select based on how much they value the product or service and their willingness-to-pay for it. And second, in many cases, it can create the perception that the product is more valuable and actually enhance customers’ perceptions of its worth. These dual properties of variable pricing mean that we are going to see increased variability and greater range in prices even in situations where prices used to be stable previously. Disney World is the latest example of popular companies taking up variable pricing.
As a consumer, you should be judicious about recognizing your own personal valuation for the product or service and make the effort to identify the range of prices offered by the seller. This usually means avoiding impulsive purchases and doing some research on prices beforehand. If you take this small step, you may end up getting really good deals when making purchases. And in cases where you do choose to pay a higher price, say when you have no choice but to buy a last-minute airline ticket, at least you’ll know that you paid the higher price because you derived greater value than your seat-mate who had to make their plans months in advance. You paid more for the flexibility.