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Principles and Traps of Price Differentiation
Principles and Traps of Price Differentiation
Stratinis
Feb 3, 2015
Why do we accept that we usually do not get the same price as the person sitting next to us on the same flight? On the other hand, why did Coca Cola create a massive fuss when differentiating beverage prices out of the vending machines depending on outside temperature and inventory? While price differentiation depending on availability and time of booking in the airline or hotel industry is absolutely common sense, it is not accepted or not even attempted in other industries. But what are the principles of price differentiation and what are the key questions?
Price differentiation is defined as using different prices for the same type of product or service in order to exploit the customer’s individual willingness to pay. There are many dimensions according to which price differentiation can be executed. The most common are:
- Customers: different prices for various customer segments, for example business to consumer prices versus business to business prices.
- Country: differentiation of prices for example between Switzerland and the European Union
- Channels: different prices in relation to the channel in which the products are sold, for example online versus offline.
- Product: different prices in relation to different features or quality.
- Product Life Cycle: price differentiation in relation to the life stage a product/a service. A well-known example is the iPhone: every time a new version is introduced to the market, Apple significantly reduces the price for the last version.
Price differentiation affects one of the most important aspects of consumer psychology: fairness. Before deciding to differentiate prices, companies have to ask themselves if the differentiation will affect the perceived price fairness.
To answer this question four aspects have to be considered:
- Is a price differentiation for the customers comprehensible?
- What is the maximum accepted price difference?
- What is the strategy against arbitrage?
- Are fences needed in order to exclude certain customer segments from low-price offers and how can they be reinforced?
Price differentiation is a very interesting topic in the field of pricing but it’s also very tricky. Differentiated prices require a well-considered approach.
Read more at:
http://www.input-consulting.ch/leistungen/pricing/entwicklung-von-preisstrategien/ (in German).
To learn how Stratinis can help solve your pricing challenges, visit
www.stratinis.com.