Flexible pricing is a business strategy in which a product’s final price is open for

negotiation. In other words, customers and sellers can get together and try to alter the
price, i.e., either knock it down or push it up. Flexible pricing does not only apply to the
price of goods but services too. It is, in fact, a very common strategy in tailor-made
services.

The term may also refer to adapting one’s prices more closely to market forces. Market
forces are the forces of supply and demand. When demand rises or supply declines, prices
go up. Conversely, when demand declines or supply increases, prices fall.

Flexible pricing – example

A carpenter, for example, charges the customer according to the amount of customization
the customer requested. The carpenter also takes into account how much he believes the
customer can afford.

Customers subsequently negotiate the price according to their understanding of the market.

Flexible pricing contrasts with fixed pricing. Fixed pricing is common among large
corporations and retailers. If I go to a major supermarket chain, I cannot negotiate the
price of goods for sale.

Perhaps, if I find a defective product, I might get a discount at a supermarket.

Customers like flexible pricing

Most customers like flexible pricing. When we can influence prices, we can more easily find
what we are looking for at an affordable price.

Rather than facing a binary choice, i.e., buy or don’t buy, there is another option. The other
option is to try to get a better price.

Flexible pricing – sellers

Sellers like flexible pricing if the strategy leads to greater sales. There are some businesses
which benefit enormously from this strategy.

Pricing flexibility can be especially beneficial for sellers of perishable goods. Perishable
goods are products that cannot be on sale for long because they either decay, become
unsafe, or disappear.

Last-minute flights

Vacant airline seats for a flight that takes off in two hours, for example, are perishable
goods. After the flight takes off, you cannot sell them.

If airline employees can negotiate with consumers directly, the company is more likely to
sell those vacant seats. In other words, a flexible pricing strategy helps sell last-minute
tickets.

“Flexible pricing makes the potential of a more efficient marketplace suddenly realizable.”

“When prices can vary constantly with changes in supply and demand at little cost, buyers
can more easily find the price at which they are willing and able to buy.”

Flexible pricing is used by the companies to gain competitive advantage. This way a
company is attract customers of different segments like age, geographies, income levels
and more. Railways for example has different pricing for senior citizens, adults and children.
Thus people of all age groups can travel but at different prices.
Sometimes when a company rolls-out a product in a new market it provides discount to
attract attention and create more demand. Established cab companies provide discount
offers in every new city where they launch the service. Hence they are able to get more
triers and create a name in the market. Once the market is saturated and demand is
sustainable these companies set a fixed price.

Everyday Examples of Flexible Pricing

Flexible pricing is common. A movie theater offers different prices at different times of day.
The matinee price is cheaper because fewer people come during the afternoon. Most people
see movies at night. A movie theater wants to influence customer behavior and pack its
matinee shows, so they offer a lower price.

When a fast food restaurant wants you to come and eat there, they offer a limited time
dollar sandwich. Even though they reduce the price, they’re actually selling much more of
the dollar sandwiches than they would at the regular price. There are many people who
don’t even eat fast food unless it’s that cheap.

One more example is ladies’ night at your local bar. It’s some night of the week when hardly
anybody comes, and very few of those that do are women. The bar wants to see more
female customers, so they offer a deal on drinks for the ladies.

The Advantages of Flexible Pricing

The biggest advantage of flexible pricing is that it allows flexibility for you the seller. You
can reduce the price when you want to move more units. If stock tightens up or demand
increases, you can raise your prices to maximize profits.

As you can see by the examples above, flexible pricing allows you to influence customer
behavior. If you want them to buy the old version before the new version comes out, you
can offer the low version at a lower price. If you want to fill your restaurant during the off-
times, you can offer an all you can eat special. Like dogs salivating at the sound of a bell,
we’re all suckers for a good deal and we don’t mind being manipulated one bit.

The Disadvantages

Flexible pricing seems like the obvious way to go because of the above benefits, but there’s
one huge advantage to a one-price strategy – it’s easy. There’s zero administration
involved. You set your price and that’s it. It can be expensive and time consuming to
constantly change prices.

A one-price strategy may also make your sales process smoother for customers. They can
buy online instantly with one click because there’s just one pricing option. With flexible
pricing, there are usually more communications involved (although there are ecommerce
software programs and services that offer flexible pricing).

One last advantage is that a one-price strategy spreads goodwill among your customers
who know they’re all getting the same price. Even though flexible pricing is so common,
your customers may not see it that way.

The Answer Is Usually Yes

Is flexible pricing good for ecommerce? The answer is usually yes. Of course, it depends on
what and how you’re selling. But in ecommerce we need to constantly respond in real-time
to current trends and the moves of our competitors. Flexible pricing is handy for that
because it allows you to make quick changes.
Sellers like Flexible Pricing if the strategy leads to greater sales. There are some businesses
which benefit enormously from this strategy. Pricing flexibility can be especially beneficial
for sellers to perishable goods. Perishable goods are products that cannot be on sale for
long because they either decay, become unsafe or disappear.
What is Penetration Pricing?

Penetration pricing is a pricing strategy that is used to quickly gain market share by setting
an initially low price to entice customers to purchase from the company. Such pricing
strategy is generally used by new entrants into a market. An extreme form of penetration
pricing is called predatory pricing.

Rationale Behind Penetration Pricing

It is common for a new entrant to use a penetration pricing strategy to compete effectively
in the marketplace. Price is one of the easiest ways to differentiate new entrants among
existing market players. The overarching goal of the pricing strategy is to:

 Capture market share

 Create brand loyalty
 Switch customers from competitors
 Generate significant demand and utilize economies of scale
 Drive competitors out of the market

Situations where penetration pricing works effectively:

 When there is little product differentiation

 Demand is price-elastic
 Where the product is suitable for a mass market (utilizing economies of scale)

Illustration and Example of Penetration Pricing

A current small-sized player in the marketplace that sells laundry detergent at $15.
Company A is an international company with a large amount of excess production capacity
and is, therefore, able to produce laundry detergents at a significantly lower cost. Company
A decides to enter the market, employ a penetration pricing strategy, and sell laundry
detergent at a sale price of $6.05. The company’s cost to produce a laundry detergent is $6.

With a marginal cost of $6 and a sale price of $6.05, Company A is making nominal profits
per sale. However, the company is comfortable with this decision as their overarching goal
is to switch customers over, capture as much market share as possible, and utilize
economies of scale with their high production capacity.
Company A believes that its competitor will not be able to sustain itself in the long-term and
will eventually exit the market. When the competitor exits the marketplace, it will become
the only seller of laundry detergent and therefore be able to establish a monopoly over the
market.

Advantages of Penetration Pricing

 High adoption and diffusion: Penetration pricing allows a product or service to be

quickly accepted and adopted by customers.
 Marketplace dominance: Competitors are typically caught off guard in a penetration
pricing strategy and are afforded little time to react. The company is able to utilize
the opportunity to switch over as many customers as possible.
 Economies of scale: The pricing strategy generates high sales quantity that allows a
firm to realize economies of scale and lower marginal cost.
 Increased goodwill: Customers that are able to find a bargain in a product or service
are likely to return to the firm in the future. In addition, the increased goodwill
creates positive word of mouth.
 High turnover: Penetration pricing results in an increased turnover rate, making
vertical supply chain partners such as retailers and distributors happy.

Market Penetration Pricing

Penetration pricing is a type of marketing strategy where businesses try to attract

customers to try a new product or service. The idea is to present a low price for a new
product or service during an initial offering in order to lure customers away from
competitors or intrigue them to try something they never considered before. In most
cases, companies will increase the price once the product or service becomes popular with
its target customer.

Penetration Pricing Advantages

In many markets, consumer demand is elastic; in other words, people will buy more of a
product the lower it is priced. A market-penetration pricing strategy is most suitable when
it creates a significant advantage for a firm that can identify and act on this type of price
sensitivity. Penetration pricing often has the effect of blocking, or at least delaying,
competition. In addition, it can help to lower per-unit costs of production when
manufacturing processes are subject to economies of scale.

Penetration Pricing Risks

If sales volume fails to build as fast as projected in response to penetration pricing, a firm
may have trouble recovering its research and development costs. Its overall profitability
will suffer if it has produced far more than it can sell. Additionally, penetration pricing can
hurt a brand's value image by suggesting to consumers that it is the cheapest – not
necessarily the best. This can unintentionally create a perceptual opportunity for
competitors with higher-priced goods.

Examples of Penetration Pricing

Some of the most successful practitioners of penetration pricing strategy are retail
discount operations, including warehouse, club and outlet stores. These types of
businesses compete much more heavily on price than on quality or other benefits and do
especially well in a weak economy. In the general merchandise category, Walmart is a
leader in penetration pricing. In the grocery sector, the Aldi chain has pioneered this
approach. Other examples can be found in categories like consumer electronics, furniture
and toys.

Alternatives to Penetration Pricing

Price skimming is the clearest alternative to price penetration. It is an attempt to create a

perception of exclusivity and value by charging the most expensive price the market will
bear. Many high-technology products, like smart phones and high-definition televisions,
have been introduced at a skimming price that is steadily reduced as the item's novelty
wears off. Another alternative is status quo pricing. Users of this strategy choose a price
that is identical or closely comparable to competition. While not an aggressive approach,
status quo pricing offers the benefit of low risk.