Learn something new every day More Info... by email
A flat rate is a singular charge paid by businesses or individuals for a good or service, rather than paying a variable rate. This allows buyers to be aware of the price required to purchase a product or service ahead of time. In economic terms, all transaction hinge around price. Charging a flat rate requires more planning and control as income is fixed; giving away more product results in higher costs, which will lower income. A flat rate can also be a marketing tool, where a company operating in an industry with variables rates charges a flat fee.
Pricing structures are the most common way a company determines how much to charge for a good or service. This structure can center on an industry standard or based on a company’s cost of production and operation. This first model results in a rate that cannot change too much without shifting consumer behavior toward a competing company. For example, an industry standard may be $10 US Dollars (USD) for five widgets. The way to increase profits is to produce widgets at the lowest cost in order to meet this standard. Offering four higher quality widgets for $10 USD may not persuade consumers to purchase these items, even though they may receive more utility from them. Consumers only see the value of goods based on the rate charged for the products.
One option for adjusting the flat rate system is to create a stair-step pricing structure. For example, the first five widgets cost $10 USD. The next five may cost $9 USD, the next five $8 USD and so on. This ultimately results in a mixed pricing structure that gives consumers a discount on volume purchases for goods or services. Under this structure, suppliers take advantage of their economies of scale, which allows them to sell more units at cheaper prices. Another option for achieving lower prices using a flat rate is selling larger groups of goods or services at a lower rate. If five widgets cost $10 USD, consumers who purchase 25 widgets may only pay $45 USD, a 10 percent discount for volume purchasing.
A problem with flat rate pricing is that consumers may not see value if goods are priced to high under a single rate. Consumers do not typically like to pay for goods or services they will not use. Companies that try to use a higher rate for a bundle of goods may face consumer backlash if the rate is higher than purchasing all the goods as individual pieces. An alternative to flat rates is to charge a variable rate. This means that buyers pay only for the goods needed or used at a certain time, saving them the extra expense from paying a single rate. As use goes up, so does the price paid; the reverse is true when use decreases.