Price Differentiation Definition and Meaning
In order to significantly increase your company’s earnings, many factors are crucial. Your pricing policy, which you operate, also plays an important role. Above all, intelligent price differentiation is necessary to be successful.
What does price differentiation mean?
Price differentiation, also often, if incorrectly called, price discrimination , describes a specific pricing policy that you as an entrepreneur follow. It is characterized by the fact that you are offering the same product on the market at different prices. There are expensive or cheap deals. You decide which price is valid where and when, taking into account market-relevant factors. In addition to space and time, this can also be a purpose. With this special pricing policy, you as a company are striving for greater economic success. If this goes according to plan, this will be noticeable, among other things, in higher product sales.
What are the goals of price differentiation?
Price differentiation is a marketing tool and there are many reasons to pursue this pricing policy. As a provider or manufacturer of products, but also services, you have the opportunity to pursue very individual goals with price differentiation. But one single goal is paramount and that is to increase profits without having to offer or produce more. There are also various sub-goals that are subordinate to the most important goal.
|Form sub-markets||It is possible for you to create new sub-markets for yourself through price differentiation. This depends entirely on the specific demand. As an entrepreneur, this will enable you to target your marketing strategy across multiple markets. This is ideal for precisely responding to the needs of customers in the submarket.|
|Acquisition of new customers||Price differentiation does not mean that there is more to be paid for the products. You can also use price differentiation to lower the prices for potential new customers, i.e. to offer them cheaper. With this variant you can win more customers for yourself.|
|Eviction of the camp||As an entrepreneur, you naturally strive to sell all of your goods. Especially when you need space in the warehouse again. You can either organize this through a sale or offer the buyers of your goods bulk prices. This means that the more they buy in goods, the lower your price.|
In almost every company there is a possibility and there is sufficient potential for using the instrument of price differentiation. But in order to really increase profits with this method, you need to have precise knowledge of your product range.
What types of price differentiation are there?
When it comes to price differentiation, you differentiate between different types. Each type will help you follow your very own strategy. A distinction is made between the following types:
- The spatial price differentiation
- The temporal price differentiation
- The factual price differentiation
- The price differentiation according to the quantity
- The personal price differentiation
The spatial price differentiation
Spatial price differentiation means the regional differentiation of market segments. These are characterized by different pricing. The location plays a very important role in this type of price differentiation. But there is also a very important prerequisite that must be met here. The product must not be easy to obtain for the customer at the relevant location. Only then is there a chance that the customer will pay more money for it.
Examples of spatial price differentiation:
- Take beer, for example: A beer that is produced here in the country costs significantly more abroad. This can be, for example, German beer, which comes on the market in Asia.
- Take a petrol station, for example: not all petrol stations have petrol at the same price. A petrol station that has no competition in a large area can charge more in terms of price than in a densely populated area with several petrol stations. In addition, gasoline prices are cheaper in rural areas than on highways.
The temporal price differentiation
When it comes to price differentiation, you as the provider usually ask for different prices at different times. This pricing can depend on the season, but also on the time of day.
Examples of price differentiation over time:
- Example bar: A very well-known example is happy hour in bars. At certain times there are cocktails or other drinks at reasonable prices.
- Take gasoline, for example: Here too, gasoline plays an important role. Petrol is often more expensive in the morning than at noon. And this applies to one and the same gas station.
- Travel portals: Everyone knows them, nobody wants to miss them. The last-minute offers on the pages of many travel portals. In terms of price, they are often significantly cheaper than at other booking times.
The factual price differentiation
When it comes to factual price differentiation, you as a provider differentiate between different uses for your products.
Examples of the factual price differentiation:
- Example electricity: Here a distinction is made between electricity tariffs for private households, for industry and for commercial purposes. Although it is the same product, the prices are very different in their amount.
- Take alcohol, for example: the price of alcohol that is used for disinfection or cleaning purposes is significantly lower than that of alcohol that is sold as luxury food.
The personal price differentiation
The personal price differentiation is also called target group-oriented price differentiation. There are different prices for the same product for different customer groups and segments in the market. In this case, customer groups benefit above all from very special offers or discount campaigns.
Examples of personal price differentiation:
- Discount campaigns for schoolchildren or students
- Low prices for students, for example in the cinema
- Customers with a customer card automatically receive discounts
- Different pricing for retirees or families
Price differentiation according to the quantity
With this form of price regulation, the price depends on the quantity. The more is bought, the cheaper the product becomes.
Examples of price differentiation according to quantity:
- Volume discount offers
- Well known from the supermarket, the “buy three – pay two” method
- Price gradation depending on the quantity for products that are provided with quantity-dependent graduated prices
Other forms of price differentiation
In addition to the forms mentioned above, there are other types of price differentiation. One of these forms is hidden price differentiation . In this case, you set different prices for different demand groups. In doing so, you try to fake certain differences in the product. You probably know the term white label . This means that, for example, you offer your branded jeans under a different name than a no-name brand, which is cheaper than the branded goods. However, there are no differences in quality or manufacture. Both are one and the same product.
There is also the performance-related price differentiation . Here you adjust your pricing policy to the needs of your customers. Next to us the example of Deutsche Bahn. A train ticket for 1st class and a train ticket for 2nd class can be purchased here. Although both products are very similar, the 1st class card costs significantly more. However, since the products are not absolutely the same, the performance-related differentiation of prices is seen as a form, but does not correctly match all other forms.