A pricing mechanism is a way of describing how buyers and sellers are matched through price. Pricing mechanisms come in two principal forms: fixed and dynamic. Fixed pricing has predefined prices based on a static set of variables while dynamic pricing changes prices based on market conditions.
Price mechanisms can affect both your revenue stream as well as your costs. When it comes to defining a business’s pricing mechanism types, I find it helpful to consider a list of different types of pricing mechanisms to guide me and my client’s thinking.
To that end, below are some common pricing mechanism types that many businesses might use for their selected customer segment. Review the following common types of pricing mechanisms and determine which one is most appropriate for your offering:
1. List Price – A fixed price for products or services is assigned. The prices are fixed and non-negotiable. A good example is the prices associated with various meal choices at a restaurant. Everyone pays the same price for the same item on the menu.
2. Product Feature Dependent – The price depends upon the quality or value proposition features. For example, when you buy meat at the butcher, you have a choice of cuts based on the USDA grading system that included prime, choice, or select cuts of meat. Another example of product feature-dependent pricing is where the customer is charged a different rate based on when it is used. Cruise ship companies have different prices to book the same stateroom during peak times, shoulder times, and off-peak times.
3. Customer Segment Dependent – The price depends on the type and characteristics of the customer segment. For example, many businesses offer special discounted rates for veterans or seniors.
4. Volume Dependent – The price charged is a function of the quantity purchased. For example, VistaPrint charges $17.00 for 100 basic business cards and $18.49 for 250.
Dynamic Pricing
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1. Negotiated Pricing – The price a customer pays is based on a negotiated price conducted between two or more partners. The price a customer pays is dependent upon the strength of his negotiation position as well as his negotiation skills. When you buy a car, the buyer and seller negotiate the final price of the vehicle.
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2. Yield Management – The price a customer pays is dependent on inventory at the time of purchase. A good example of yield management pricing is the price a customer pays for an airline ticket or hotel room. Based on the inventory of available seats or beds compared to an expected quantity, the price can go up or down to maximize the company’s margins.
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3. Real-Time Market – The price is established dynamically based on broader supply and demand issues. For example, the price of a stock rises and falls based on the number of buyers and sellers at any given time who are interested in buying or selling the underlining stock. Commodities like eggs or crude oil are another example of real-time market pricing that vary based on supply and demand issues.
4. Auction – The price is determined by the outcome of a competitive bidding process. Whether at an estate sale. car auction, or on eBay, the final price of a product is determined through an auction process.
What pricing mechanisms does your business use?
Be sure to check out our paper “Pricing Strategies – Extracting the highest margins possible”
Also, don’t forget to check out our advice navigator section dedicated to pricing concepts every small business owner needs to know about pricing strategies and pricing tactics.
