Let’s start with an example to introduce variable or dynamic pricing. I’ll use a professional services example (as in Part 1), but later, I’ll highlight other industries. Imagine you specialize in cybersecurity strategy, and a client asks you to review their three-year cyber strategy. Using cost-plus pricing, you might quickly calculate the cost like this:
Now, assuming the scope is the same, what variables could increase or decrease this cost?
- Client Industry: High-risk or highly regulated industries may require a premium due to the complexity and expertise involved.
- Client Location: Clients in high-rent areas may pay more, even if you don’t operate from such an area, to reflect regional service costs.
- Time of Year: If you have excess capacity (e.g., team members on the bench), do you lower your price to secure the project?
- Timeframe: If the client needs the review done before year-end, does the urgency justify a price increase?
- Client Size: Should an SMB (small and medium-sized business) pay the same as a Fortune 500 client?
- Client Relationship and Loyalty: Long-term clients or those providing strong referrals—do you offer them a discount, or charge full price?
You can easily see how these variables impact pricing. With cost-plus pricing, many of these factors are often overlooked, and companies may just copy and paste the details from a previous Statement of Work (SOW). Let’s explore how dynamic pricing accounts for these variables:
In this example, by applying dynamic pricing, the base cost and margin stay the same, but adjusting for variables increases the price by $1,703, resulting in a 62.5% margin.
Essentially, variable/dynamic pricing assumes that your costs are fixed, but the amount you charge fluctuates based on factors like client industry, urgency, or location. When running my cybersecurity consulting business, we utilized dynamic pricing, which allowed our consultants to adjust pricing per engagement, ensuring our fees reflected the true value we delivered.
Other Examples of Variable-Based Pricing:
- Airline Tickets: Airlines use dynamic pricing algorithms that adjust ticket prices based on real-time demand, time to departure, and seat availability. Prices typically rise as the flight date approaches, especially with increased demand, but may drop if seats remain unsold close to departure.
- Ridesharing Apps (e.g., Uber, Lyft): These companies use surge pricing, which increases fares during high-demand periods such as rush hour, bad weather, or special events. Prices normalize once demand drops, making this a prime example of dynamic pricing.
- Hotel Room Rates: Hotels adjust room rates based on factors like seasonality, holidays, nearby events, and occupancy. For example, prices rise during popular local events (festivals, conferences) and drop during off-peak times.
- Game Tickets: Sports teams adjust ticket prices based on game demand, the opponent, and the time of the season. High-demand games (against popular teams or playoffs) have higher prices, while low-demand games (against less popular teams or on weekdays) may offer lower prices to attract more fans. Resale platforms like StubHub also use dynamic pricing, especially for sold-out events, with prices rising based on demand.
Variable-based pricing allows you to capture more value from each engagement by adjusting your prices based on relevant factors like client industry, urgency, and market demand. It offers the flexibility to tailor your pricing to different circumstances, ensuring you’re not leaving money on the table. While cost-plus pricing focuses solely on covering costs and adding a standard margin, dynamic pricing lets you account for the unique dynamics of each project. Keep an eye out for Part 3, where we’ll dive into value-based pricing and provide a summary comparison of all three pricing strategies.
