Differential pricing

From CEOpedia | Management online
Differential pricing
See also


Differential pricing is the price strategy, when dealer sells the same products, but in the different price. For some people that is unfair strategy. The seller's goal is to increase prices for these customers who can pay more, without losing group where they are more sensitive for raising prices[1].

Differential pricing based on customer characteristics

One method of differential pricing involves adapting pricing based on customer characteristics. Customers might be offered differen prcies based on their socioeconomic status, their past purshase history, credit score, etc. The sale of automobiles and real estata is something that often uses differential pricing based on customer characteristics, because a customer who has a stronger financial history will be able to secure a more favorable loan compared to one with a weak history. It is also the case that businesses often loot at a customer's Willingness to Pay (WTP) to adjust their prices. For instance, corporate users tend to be able to afford a product at a higher price compared to studends, which is why so many products have educational discounts[2]. Reduced student pricing in combination with a subscription service is one recent development that many companies have started to use such as Adobe and Apple, which have offered their design and music streaming software at a discounted price to students.

Differential pricing based on product features

Changing pricing based on the characteristics of customers, some businesses choose to offer variation in pricing based on their products. This is something known as versioning where the latest version of a product retails at a higher price compared to other versions because the company knows people will pay more for the latest and greatest features[3]. Smartphones companies make use of this with their products, as one can see how a new iPhone XS will cost more than a comparative iPhone XR. The iPhone XS is an objectively better product even though it has many of the same basic calling and texting features, so Apple charges more for this.

Differential pricing based on sales volume

Another example of differential pricing comes from the way in which campanies adjust their pricing based on sales volume. Essentially, they can offer some customers a discount if they choose to place a bulk order. This incetivizes the customer to spend more money and gives them the chance to save money by getting a bit of discount. One can see this commonly used in grocery stores in which buying products in bulk such as bottles of water will typically save the customer more money per unit[4].

Differential pricing based on Value-based pricing

Finally, companies can choose to make use of value-based pricing in which companies will set their prices based on the customer's perceived value. A company may charge more for the same service as its competitor if it can prove that it is more reliable or is able to add some aspect of quality to the service. This is why auto repair shops will charge different prices for the same service such as an oil change, as some shops are more confident in their ability to get the job done at a faster rate, wchich increases the prerceived quality of the service[5].

Footnotes

  1. Big data and Differential pricing 2015
  2. Workshop on Differential Pricing and Financing of Essential Drugs 2001
  3. Big data and Differential pricing 2015
  4. The Transformation of Pricing Models on the Web: Examples from the Airline Industry 2000
  5. Value-based Differential pricing: Efficient prices for drugs in a global context 2015

References

Author: Wojciech Ślusarczyk