Price Differentiation Definition and Meaning 2
What are the advantages of price differentiation?
As already mentioned, when it comes to price differentiation, the focus is on increasing profits. But not every customer has the same ideas when it comes to willingness to pay. In order to still be able to sufficiently tap your potential in the market, you try to achieve this with a different pricing policy. You can reach as many customers as possible by addressing them specifically and positively influence their willingness to buy. The price differentiation instrument has the following advantages for you.
|· You can offer your customers more choices
|· Price differentiation helps you to acquire new customers
|· It contributes to the loyalty of existing customers
|· By reducing the inventory you create new space in the warehouse
|· With the price differentiation, you are also able to occupy niches
|· You can use a competition analysis to adapt the price structure to the structure of your competitors
|· Even with seasonal fluctuations, you can ensure optimal utilization
Comparison of price differentiation to price discrimination
Many mention price differentiation in the same breath as price discrimination. In principle, this is not entirely wrong, because you as an entrepreneur offer an identical product at different prices. But there is still a difference between the two terms.
In the case of price discrimination, a distinction is made between first-degree and second-degree price discrimination. To further differentiate, there is also the 3rd degree price discrimination option. These terms are mainly used in microeconomics .
When it comes to price differentiation, on the other hand, you look at the various segments in the market and with customers. After this segmentation, you set your prices. In general, it is a tool that is used in marketing .
What requirements do you need for price differentiation?
Price differentiation can only work if a few conditions are met. If all customers suddenly pick up your product with the lowest price, your plan collapses. The most important requirements to be met are as follows.
- Customers have to judge your prices differently. They are ready to accept different maximum prices because their price expectations are different.
- The prerequisite must be that the customer reacts differently to changes in your prices and that the price elasticities are different.
- You have to be able to divide your customers into at least two different segments.
- The prerequisite must be that you can treat your customers with the different prices separately from each other in terms of sales channels and marketing.
How can you create the conditions?
In the first step, it is important for you to clarify how you are addressing the different customer segments. Furthermore, you have to strictly separate them from each other. You also need to come up with reasons that justify at least two different prices. You have to communicate these reasons either directly or indirectly, or make them visible.
- Direct communication means that the customer recognizes both variants and chooses one of them. For example, this can be a small package because he needs less or the customer prefers to buy from specialist retailers because advisory services are important.
- Indirect communication means that the customer can only choose one variant of your product. Or he waives the purchase for price reasons. In the example of the early bird discount, there is also indirect communication. The promotion is only valid for a clearly defined period of time. If the customer decides too late, he has to pay the normal price.
What instruments and examples are there for price differentiation?
The possibilities and instruments are very diverse. This applies above all to retail products in the consumer goods sector. Here you can use the following instruments.
- Packaging in different sizes
- work with special offers
- Issuing customer cards with loyalty rewards or discounts
- Voucher or coupon campaigns
- Sell your products in the factory outlet
- Products as a simple variant
- Offer of additional services, for example longer guarantee periods
You can use the following instruments for the commercial sector.
- Offer of different contract terms
- Adapt deliveries flexibly to the needs of the customer
- Discounts on certain quantities
- Offer of a spare parts service
- Special price offers for premium customers
Storage does not play a role in the case of services, because services cannot be stored. But here, too, there are instruments that you can use.
- Super last minute offers
- Early bird discounts
- the simultaneous control of price and capacity, also called yield management
Alternative price bundling
As an alternative to price differentiation, you can also work with the price bundling instrument in your pricing. In technical jargon, bundling packages with several products or services at a certain package price is also called bundling. The best example of such a bundling is hotel accommodation with breakfast. This allows you to take advantage of the customers’ different willingness to pay and, moreover, to influence their purchase decision.
- By bundling prices, you change the customer’s perception of prices. The customer sees a larger range of products or services and therefore pays less attention to the price.
- If the prices for individual products are too high from the customer’s point of view, you can disguise this with bundling.
- With price bundling you can hide price increases very well.
The advantages of price bundling for the customer
The bundling of prices does not only result in advantages for you. The customer can also take advantage of certain advantages.
- The customer feels more service and convenience when making a purchase, because the order or purchase process only has to be run through once.
- If the purchase price for a package is lower than the sum of the individual products, he will buy cheaper.
- The customer appreciates the individuality that he gets with a package tailored to his needs.
Price differentiation is a very good way to maximize your bottom line . It can be used as a versatile instrument in all areas of trade and for almost all products. In addition, the necessary prerequisites for price differentiation must be met. In addition to the main goal of increasing profits, you can use the price differentiation instrument to pursue a few other secondary goals.