Advantages of differential pricing

Written by neil kokemuller Google
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Advantages of differential pricing
A key to successful differential pricing is a subtle system to avoid alienating customers. (Jupiterimages/Creatas/Getty Images)

Differential pricing, also commonly referred to as discriminatory pricing or multiple pricing, is a pricing strategy in which a company charges different products for the same product or service based on a variety of customer and transaction-related factors, including the quantity ordered, delivery time and payment terms.

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Pricing and Marketing Mix

Price is one of the 4 P's in the marketing mix. Product, place or distribution and promotion are the other three. These four significant marketing components combined are a major part of a company's approach to marketing a given product or service. Price has a significant impact on marketing strategy. Some companies market as the low-cost provider, others market value orientation, others sell high-end solutions at high price points. A differential pricing approach essentially attempts to target multiple customer segments with a similar solution, but different price points.

Revenue Optimization

The main advantage of differential pricing is that it enables a company to optimise its revenue. In general, a company wants to sell its products or services to a given customer for as much as he is willing to pay. Practically, one customer may have a higher desire for the product or service than another. Though sometimes difficult to implement, companies that can take advantage of the ability to sell at higher price points to customers with stronger interest can earn more revenue than a flat price. The airline industry, for instance, often sells tickets at higher prices early and reduces rates as flights draw nearer to fill empty seats.

Cost Covering

Another major benefit of a differential pricing strategy is the ability to establish diverse price points that help account for the costs of making products. The GAVI Financing Task Force, in its "Differential Pricing: A Case Study of Vaccines," indicates that if a company has a way to charge customers with greater demand a higher price, they can cover most of the common costs of offering the product. This allows more price sensitive customers to cover only what is the marginal cost of their products.

Production Efficiency

Effective differential pricing has a strong correlation with high production efficiency, according to the GAVI case. When companies are able to price based on demand to cover costs with predictable accuracy, it makes it much easier for firms to produce just what customers will buy. Over-production can impact supply-and-demand and make it more difficult to derive higher price points from more willing customers.

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