The Advantages and Disadvantages of Fixed Pricing and Dynamic Pricing

Fixed pricing is a strategy in which a price point is established and maintained for an extended period of time. Dynamic pricing means the price on a product or service can change over time. Selecting the appropriate strategy for your business has major implications in your ongoing effort to attract customers and achieve optimal profit margins.

Fixed pricing is intended to attract more customers and clients because it offers them assurances. On project work, for instance, a fixed price for the entirety of the job allows the prospective client to know how much he will pay prior to agreement. Fixed pricing is also consistent, so customers get used to your pricing and you have less risk of offending them by fluctuating prices over time. Sales forecasting and profit estimates are also simpler when you know your price point.

The risk with fixed pricing is that it doesn't allow for adjustments if you get into product or service delivery and realize your cost basis is higher than expected. The customer pays the established price regardless of changes in your time or costs. This may mean you undercharge a customer due to a lot of additional work hours beyond those estimated in the price quote. Fixed pricing also doesn't allow for adjustments over time to sell off extra inventory or available seats for entertainment and other types of events.

Dynamic pricing often is referred to as discriminatory pricing because it allows you to maximize profits with each customer. This approach is common in event promotions: If initial demand is low, facility or event managers work to sell off open seats to generate whatever revenue is possible. Another strength of dynamic pricing is the ability to adjust prices for service projects or products based on the time and costs involved or fluctuating demand. Seafood distributors and restaurants, for instance, often vary prices depending on season and inventory supply.

Dynamic pricing can lead to customer alienation. If customers realize they paid higher prices than others for the same solution, they may demand their money back or spread negative messages in the marketplace. This approach also may turn off customers who prefer to know the set price up front on a purchase. Another challenge for companies that use dynamic pricing is the need for advanced technology programs to optimize price adjustments over time. Regular users in entertainment and hospitality often have very intricate software solutions programmed to adjust prices in real time based on demand.