Differential Pricing: The Art of Flexible Pricing and Its Prolific Impact.
Over the last week, there has been a furore over differential pricing. One of the large pub chains (Stonegate) announced that they were introducing higher prices for their drinks at the most popular times of the day. This has caused both outrage and consternation in the drinking population. How dare they charge more for a ‘pint’ on a Saturday night than they do on a wet Tuesday afternoon. Of course, this outrage is misplaced. Pubs have been using differential pricing for years, after all, what is a ‘happy hour’ if it’s not differential pricing?
As a strategy differential pricing can be very effective. This approach, also known as price discrimination, involves charging different prices to different consumers for essentially the same product or service. At first glance, this may seem unfair or even counterintuitive. However, when executed judiciously, differential pricing can maximise profits, enhance consumer welfare, and support market penetration.
How Differential Pricing Works.
Differential pricing thrives on one primary premise: consumers have different willingness-to-pay for a product or service. This willingness can be influenced by various factors including their income levels, the urgency of need, geographic location, and even buying habits. By segmenting the market based on these and other criteria, businesses can tailor prices to match what each segment is most likely to pay.
One of the most cited examples of differential pricing is the airline industry. Ever wondered why passengers on the same flight, sitting in the same class, might have paid vastly different fares? It’s differential pricing at play.
Advance Purchase: Airlines typically charge lower prices for tickets purchased well in advance and hike up the prices as the departure date nears. This caters to two distinct segments: the planners who are more price-sensitive and the last-minute travellers who are willing to pay a premium for urgency.
Refundability: Another variation is the non-refundable ticket versus the refundable one. Business travellers, who often require flexibility due to unpredictable schedules, might opt for the pricier refundable tickets, while vacation travellers might choose non-refundable options in exchange for a lower fare.
Beyond Airlines: Other Examples.
Cinemas: Many cinemas offer reduced prices for seniors, children, or matinee showings. Here, the segmentation is based on age and time, recognising that certain groups (like seniors and children) might have a lower willingness to pay.
Software Companies: Tech giants like Microsoft or Adobe offer software products at reduced prices for students or non-profit organisations. While the software is identical, the pricing caters to the user’s ability to pay.
Discount Coupons: Brands often use coupons to offer discounts selectively. Only those consumers who value the discount enough to take the effort to find and use the coupon benefit, allowing businesses to serve both price-sensitive and less-sensitive segments.
Geographical Pricing: Streaming services, software products, or even physical goods might have different prices in different countries, reflecting the varying economic standards and purchasing powers. Petrol (or Gasoline) is always considerably more expensive at service stations on the highway than at your local supermarket.
Benefits of Differential Pricing.
Maximised Profits: By charging consumers based on their willingness to pay, businesses can harvest more consumer surplus and translate it into higher profits.
Market Penetration: Differential pricing can help businesses tap into various market segments, including those they might not have accessed with a single price strategy.
Consumer Welfare: Believe it or not, differential pricing can benefit consumers too. Consider life-saving drugs. If pharmaceutical companies charge lower prices in developing countries and higher prices in developed ones, they can make essential drugs accessible to those who need them most.
Challenges and Considerations.
Differential pricing isn’t without its pitfalls. It demands rigorous market research to identify segments and set prices. Moreover, there’s always the risk of consumer backlash. If consumers feel they’re being unjustly charged more, they may resort to negative publicity or switch to competitors.
Moreover, in the age of the internet, price differences are more transparent than ever. Consumers can easily compare prices across regions or segments, which can erode trust if the strategy is perceived as exploitative.
Differential pricing is a powerful tool in the arsenal of pricing strategies. When wielded with care and consideration, it can deliver immense benefits for businesses and consumers alike. However, it’s crucial for businesses to approach this strategy with an ethical lens and transparent communication. In the dynamic landscape of commerce, understanding, and respecting the consumer’s perception of value is paramount.
Differential pricing is just one element of a pricing strategy that we cover in our pricing mastery course. You can find out more about this here….