Variable pricing is a pricing mechanism where costs or revenues fluctuate based on market conditions, benchmark indices, or other predetermined variables rather than fixed price levels. This approach allows prices to adjust with changing market fundamentals while sharing price risk between counterparties. Variable pricing is common in long-term contracts and commodity agreements.

Variable pricing mechanisms help maintain market competitiveness and reduce contract renegotiation needs during changing market conditions. Pricing formulas may reference spot markets, published indices, or economic indicators with adjustment periods and price floors or ceilings. Understanding variable pricing helps assess contract risks and opportunities in volatile markets.

Real-world example: A 5-year natural gas supply contract uses variable pricing linked to Henry Hub monthly averages plus a fixed margin of $0.25 per MMBtu, allowing both parties to share market price risk while maintaining a stable commercial relationship.