4.5.4 (HL)—HL pricing methods

Dynamic pricing changes prices with demand, timing, capacity or customer data; competitive pricing uses rivals' prices as a reference; contribution pricing focuses on contribution per unit = selling price − variable cost per unit; price elasticity of demand (PED) = percentage change in quantity demanded ÷ percentage change in price.

Dynamic pricing can raise revenue and manage scarce capacity but may appear unfair. Competitive pricing helps an offer remain comparable but can trigger price wars or ignore its costs and differentiation. Contribution pricing can support short-run use of spare capacity when price exceeds variable cost, but the total contribution must still cover fixed costs in the longer run. PED estimates how strongly quantity demanded responds to price.

Use PED with objectives and capacity: when demand is price inelastic, a price rise may increase revenue; when it is elastic, a price cut may increase revenue if capacity and contribution remain adequate. Treat PED as an estimate that can change across time, segments and price ranges.

A spare-capacity order priced at $18 with variable cost of$11 contributes $7 per unit toward fixed costs and profit. It may be worthwhile in the short run, but not if it displaces higher-margin sales or damages the usual market price.

Contribution is not profit because fixed costs remain. PED's conventional value is often negative, so evaluation commonly uses its magnitude; do not infer a pricing decision from elasticity alone.