Differential pricing

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.

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. 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. 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.

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.

Examples of Differential pricing

• Discounts for Students: Students receive discounts when purchasing certain items such as clothes, electronics, books, etc.
• Discounts for Seniors: Many stores offer discounts to senior citizens.
• Discounts for Military: Many stores and businesses offer discounts to members of the military.
• Dynamic Pricing: This is when the price of a product or service changes depending on the demand. Airlines are a common example of dynamic pricing.
• Personalized Pricing: This is when a company uses customer data to determine the price of a product or service. For example, a company may charge different prices for the same product depending on a customer's location, purchase history, demographics, etc.
• Premium Pricing: This is when a company charges more for a product or service due to its higher perceived value. Luxury brands often use this pricing strategy.
• Volume Discounts: This is when a company offers discounts to customers who purchase large quantities of a product or service.
• Geographical Pricing: This is when a company charges different prices in different geographical regions. This allows the company to better compete in certain markets.
• Tiered Pricing: This is when a company charges different prices depending on the features or benefits of a product or service. This can be used to encourage customers to purchase higher-end products.

Advantages of Differential pricing

Differential pricing is a strategy used by companies to maximize profits by charging different prices for the same goods or services. It can be beneficial for both businesses and customers, as it allows businesses to adjust pricing to target different customer segments and it allows customers to pay a price that is tailored to their individual needs. The main advantages of differential pricing include:

• Increased Profits: Differential pricing allows businesses to generate more profits by charging different prices for the same product. Businesses can target different customer segments and adjust their pricing accordingly, potentially increasing their profits.
• Increased Accessibility: Differential pricing allows customers to access products or services that they would not have been able to afford otherwise. By lowering the prices for certain customer segments, businesses can make their products or services more accessible to a wider range of customers.
• Increased Revenue: By charging different prices for the same product, businesses can increase their total revenue. This is especially true if they are able to target customer segments that are willing to pay more for their products.
• Cost Savings: By charging different prices for the same product, businesses can save costs associated with marketing and advertising. They can also reduce costs associated with production, as they will only need to produce a certain quantity of the product.

Limitations of Differential pricing

Differential pricing is a pricing strategy used to increase profits, however, it has certain limitations that must be taken into consideration. These limitations include:

• It can lead to a decrease in customer loyalty as customers may feel they are being taken advantage of and that their loyalty is not being rewarded.
• It can be difficult to implement the strategy correctly as the right prices must be set to ensure that all customer groups are satisfied.
• It can create an environment of unfair competition as companies may use differential pricing to gain a competitive advantage over their competitors.
• Differential pricing can lead to an increase in price discrimination which may lead to higher prices for some customers who can not afford to pay more.
• It can lead to legal issues if it is not properly implemented and customers feel their rights are being violated.

Other approaches related to Differential pricing

Differential pricing is a pricing strategy that sets different prices for the same product or service. It is used to increase revenues and maximize profits. This strategy is often controversial, as it may be perceived as unfair. Other pricing approaches related to differential pricing include:

• Price Discrimination: This strategy involves setting different prices for different groups of customers, based on their willingness to pay.
• Price Skimming: This approach involves setting higher prices for a product initially, and then gradually reducing the price over time.
• Bundling: This method involves offering multiple products as a single package, with a discounted price.
• Loss Leader Pricing: This method involves offering a product at a price lower than its production cost, in order to attract more customers for other products.

In conclusion, differential pricing is a pricing strategy that involves setting different prices for the same product or service. Other related pricing strategies include price discrimination, price skimming, bundling, and loss leader pricing.

Footnotes

Differential pricing — recommended articles

Segmented pricing — Aggregator model — Optional product pricing — Private label products — Discriminatory pricing — Product line pricing — Mass Merchandising — Price-Taker — Price strategy to eliminate competitors

References

• Council of economic advisers (2015), Big data and Differential pricing , Executive office of the president of the United States
• Danzon P., Towse A., Mestre-Ferrandiz J., (2015), Value-based Differential pricing: Efficient prices for drugs in a global context, University of Pennsylvania, Philadelphia, PA, USA
• Klein S., Loebbecke C. (2000),The Transformation of Pricing Models on the Web: Examples from the Airline Industry, Bled, Slovenia
• Watal J. (2001), Workshop on Differential Pricing and Financing of Essential Drugs, Counsultant to the WTO Secretariat

Author: Wojciech Ślusarczyk