Differential pricing is one of the most used strategies in the business. You can use it thoroughly for any small or giant business. It has various benefits for the business. Thus, this article has mentioned everything you need to know about differential pricing.
Differential Pricing refers to charging different prices for the same product and quantity. You charge different prices from different customers depending on the product form, payment terms, delivery time, and customer segment.
What is Differential Pricing?
Companies generally adopt this pricing method to maximize the profit of the organization. You can also call this pricing discriminatory pricing or multiple pricing.
5 Types of Differential Pricing
There are 5 types of differential pricing in the market. Let’s have a look at all of them:
Per the Group of Customer
A market has various sets of groups that have different needs and wants. Their paying capacity is also different. In such cases, differential pricing helps the companies and brands to set different prices for each set of groups while also fulfilling their needs and wants.
Differential pricing also teaches you to offer discount vouchers to your different types of customers. It will encourage them to return and go shopping again because these vouchers offer promotional pricing while others have to pay the standard price for the same product.
Based on the Image of the Brand
You can also change the price of your products based on your brand’s image in that customer’s eyes. Generally, a brand’s image is from city to city or even nation to nation. Every brand would have a place with a good customer base, while some places have non-favourable customers.
Therefore, differential pricing says your pricing should have geographical pricing. This is how you can generate more revenue.
Taking into account the Products
There are many products in the market, and all have different versions and iterations. For example, there are many types of mobile phones with various versions and specifications. Each of the customers purchases the mobile phone based on their preference. It also comes under a different pricing policy.
Every product has different standard pricing. It will divide your audience in various forms and increase your chances of making more profits. Therefore, this differential pricing depends upon the functions and specifications of the products.
Based on the Geographical Position
Price varies a lot with the geographical locations. For example, the transportation cost directly impacts the prices. Suppose a company operates in a rural area; it has to charge higher than the one operating in a rural area.
In simple words, the more distance is between the business and the customer, the higher the price a customer has to pay. Therefore, geographical locations impact product pricing a lot. It is one of the types of differential pricing.
Based upon the Time of Year
Some products’ demand is seasonal. It increases the price and demands both in its season. For example, umbrella demand and price increases in the rainy season. Therefore, pricing states that the product price could also change based on which time of the year you’re purchasing the product.
Differential Pricing Strategies
There are several strategies for differential pricing:
1. Value-Based Pricing – Value-based pricing refers to the quality of products. But, your product should be priced based on the value it provides to the customers. Therefore, your customer will pay any legit price if your product adds value to their lives.
2. New Pricing Plans – It refers to the pricing plan, where you try different new and different prices of the products. It allows you to try and test the product with various new prices. You earn good money through this pricing by launching new products.
3. Versions – A product consists of various versions and functions. Thus, the price depends upon the version of the product you need. For example, Cars come up with various features and versions. You have to pay the price based on the facilities you will get.
4. Range of Prices – Various products come up in ranges of prices. This means there is not a single price; instead, it ranges from something to something. Customers take up the price based on the product and their purchase power.
Advantages and Disadvantages of Differential Pricing
Differential pricing is also known as demand differential pricing. It has various advantages and disadvantages. Let’s have a look at them.
Advantages:
- Increased Market Research: It is essential to carefully set up the price of your product in the long-term game. Thus, you have to do more research on your target customers to increase your market share. It will help you bring a wider audience.
- Increased Revenues: Uber is one of the most successful ride-sharing companies worldwide. It also uses the differential pricing model. Likewise the Uber, you can also use the surge pricing and price tracking concept to increase your product’s demand and sales.
- Better Price Management: It is one of the best methods to manage prices based on capital management in the company. This strategy will help you cover all of your costs used in the business.
- Streamlined Production: The more effective your pricing strategy is, the more streamlined your production will be. It helps businesses to sell their products to a different set of customers. It directly increases your revenue too.
Disadvantages:
- Lower The Earnings: It generally suggests cutting down the prices. And it would be loss-making for your company or brand in the long run.
- Lose Price-Oriented Customer: Most customers purchase by looking at the discounted price only. Thus, you will lose one of your customers whenever your offerings end.
- Customer Can Resell: Some customers can buy the products from your site at a low rate and resell them at a higher rate to another party.
Differential Pricing Examples
There are various examples of differential pricing. We have mentioned several of them below:
Example #1: Volume Discounts
You can easily use differential pricing when you want to offer volume discounts. Generally, it is one of the best strategies for bookstores or garment stores. You would have generally seen such offerings there, as the buy one get one type of offerings.
Example #2: Seasonal Discounts
Travel agencies and airlines generally offer seasonal discounts. They use differential pricing, drop the prices while the demand is lower, and increase the prices when the demand is higher. For instance, the room price is generally lower during the off-season and much higher during the season.
Example #3: Group Discounts
Italso helps by giving group discounts. It generally happens in the entertainment industry. Restaurants and theaters can easily offer group discounts. However, if you have any other business, you can use the differential pricing there. For example, if you have a bookstore, you can offer different discounts for students, teachers, and librarians. It will increase your sales.
Final Words
Differential pricing allows you to set up different prices for different customers. It could be a time-consuming and challenging task for your business. You must look for the various aspects of your business and its customers to set the proper pricing. We hope you like this guide and find all the essential information regarding differential pricing.