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Differential Pricing

Updated on March 19, 2024
Article byKosha Mehta
Edited byKosha Mehta
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Differential Pricing?

Differential pricing is a pricing strategy in which a firm employs distinctive rates for the same item based on varying customer types, the time of purchase, and other factors. This pricing strategy is called discriminatory pricing, flexible pricing, multiple pricing, and variable pricing.

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Differential pricing refers to the practice of determining a product’s price based on the client’s features, such as their purchasing histories and behavior. Additionally, this enables a firm to charge various pricing to different clients for the same goods.

Key Takeaways

  • The differential allows a free market system based on the market’s demand and supply. In addition, it emphasizes a pricing system that is always changing, which results in improved price monitoring, price matching, and price scraping.
  • It is a two-price method that concentrates on segmented price management. It enables businesses to charge various amounts for the same product, giving more flexibility in running a business.
  • Differential pricing is a strategy that may be developed based on distinct market groups, consumers’ needs for goods, the degree to which those wants are elastic or inelastic, geography, seasonal discounts, and other factors.
  • The client receives a reduced price per unit, and the business sees a gain in revenue from a single transaction when differential pricing is combined with discounts.

Differential Pricing Strategy Explained

Differential pricing, also called dual pricing, is a two-price system or a divided market mechanism in which the vendor charges different rates for the same item for different purchasers. Other names for differential pricing include dual pricing. This method establishes for us a free market system in terms of the demand and supply that exists in the market.

The fundamental idea behind this system is that it employs a variable pricing structure. This means that while some of the output is sold at standard prices, other parts are permitted to be sold at variable prices. The consumer’s purchasing power determines these variable prices in addition to other market forces, such as the timing of the consumer’s purchases.

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Types

Let us look at the types of differential pricing:

#1 – Per the Group of Customers

The market serves many consumer groups, each of which has a unique set of wants or criteria for which they are willing to pay. Therefore, the differential pricing system establishes it as a group with the responsibility of determining the needed price of the product for each distinct sector of the group. It might be different for each client group depending on how much each group spends.

One common practice among many businesses is to offer discount vouchers to consumers who have demonstrated continued loyalty to the brand. Customers who use these coupons obtain the product at a reduced price, while other customers will pay the standard price for the identical product. Customers who do not use these coupons will pay the standard price.

#2 – On the basis of the Image of the Brand

The preferences and preferences of customers in each location may have a significant impact on the image that consumers have of a brand in that region. There is a significant chance that customers in one state or nation have a very favorable impression of a certain brand. Still, customers might not share that impression in another state or country. This is a risk that cannot be eliminated.

The corporation must charge varying rates for the same goods based on the demand for the product and its reputation in the market. When compared to other nations, the price in the nation or state where it has a positive reputation might be significantly greater.

#3 – Taking into account the Products

There are many different items on the market, and each comes in various iterations, each of which has its unique pricing.

For instance, a mobile phone manufacturing business would produce many distinct iterations of its device, each with its unique features and selling price. The client has the option of purchasing an affordably priced variety that is suitable for their needs and finances. However, in a few accessible versions, there are also certain premium variants, and the firms charge an additional amount on top of the regular product costs for these premium variants.

#4 – According to the Geographical Position

Because the price of a manufactured good includes all of the other costs associated with the good up until the point at which it is purchased by the end user, such as the cost of transportation, businesses that operate in rural areas may charge higher prices for identically manufactured goods than businesses that operate in urban areas. The greater the distance between the location of the business and that of the customer, the higher the price will be. Therefore, the price of the same product might be varied depending on the many selling locations. This is especially true in the case of international selling, when differential pricing plays a significant role.

#5 – According to the Time of Year

Let’s make sense of it using the illustration of an umbrella. Of course, because of the increased demand and necessity for a product, the cost of raincoats will be much higher during the wet season. But on the other hand, if one purchases a raincoat at any other time of the year, there is a good possibility that one will be able to acquire it at a reduced price.

Examples

Let us look at the examples of differential pricing:

Example #1

When many items of the same kind are purchased simultaneously, buyers typically receive a price break. For instance, a grocery store may offer a discount of fifty cents on a box of bread that would normally cost two dollars if the customer purchases six boxes. In addition, the price strategy known as buy-one-get-one-free, sometimes known as a quantity discount, is frequently utilized in grocery stores.

Example #2

An article by CNBC explains how it is common practice for airlines to adjust the cost of a seat on a trip dependent on how far in advance the ticket is booked. They boost prices because they are aware that customers who buy flights closer to the departure date have fewer alternatives. Thus they can justify doing so. If an airplane still has many empty seats close to the time of departure, the airline could offer discounts on those seats. However, it cautions against providing discounts to customers who buy late since this can create a waiting-and-seeing game that encourages consumers to buy late frequently.

Advantages And Disadvantages

Let us look at the pros and cons of differential pricing:

Advantages

  1. When a corporation implements differentiated pricing, the strategy encompasses a larger portion of its target demographic. In addition, customers from a wide variety of socioeconomic backgrounds can purchase the goods since the prices vary according to a market segment. Therefore, differential pricing has the potential to help the expansion of the customer base across a variety of market groups.
  2. Contributing to an increase in the firm’s revenue. Differential price increases the firm’s revenue by contributing to an increase in the sale of the product to the greatest extent possible. This is because differential pricing offers the products to customers according to the customers’ ability to pay for the products.
  3. It helps firms better manage their expenses. Differentiated pricing provides businesses with an easier way to better manage the costs associated with the manufacturing and distribution of their goods. As was just established, every consumer possesses a unique capability for buying. As a result, the firm is able to sell its goods to a larger set of customers and recoup the costs they spent as a result of doing so, thanks to the use of differentiated pricing.
  4. Decreases the amount of pressure placed on the manufacturing process: To improve the production process, the buying and selling cycle must go hand in hand. If items were made but not sold, they would perish or be thrown away. Therefore, it is helpful to use a differential pricing system to ensure that most of the items produced are sold at either high or low prices to prevent such losses.

Disadvantages

  • Since a firm won’t get the full amount it regularly charges, its earnings from the discounted sales will be lower than usual. This will decrease income over time if the price cutting is permanent, such as for a senior citizen or student pass.
  • If the prices finally go back up after a sale or after a coupon offer ends, the firm risks losing new customers who cannot afford the full price of the product or service.
  • When it comes to buying a tangible good, a person eligible for a price reduction of a great amount can turn around and sell the item to another individual for a greater price.
  • This enables the customer to benefit from the offering, even if the business will not see any financial gain.

Differential Pricing vs Dynamic Pricing

  • Differential pricing may be seen as a component of dynamic pricing strategies. Still, the primary distinction is that it places a far greater emphasis on the client’s qualities and purchasing patterns. In contrast hand, dynamic pricing places emphasis on the current state of the market.
  • Differential pricing is a technique that is more specific and narrowly targeted. A more comprehensive strategy is to use dynamic pricing.
  • As the term “dynamic pricing” indicates, there will need to be more regular adjustments to the prices. The shift could take place over the course of a few days, or it might take place within the course of a few hours or minutes, based on how competitive the market in question is.

Frequently Asked Questions (FAQs)

How does branding help in differential pricing?

A brand name helps create an image of the product’s quality among consumers. It helps customers differentiate the products of different firms. Marketers can charge different prices, and having a good brand image; the organization can charge premium prices.

What is differential pricing strategy?

A pricing strategy in which a company sets different prices for the same product based on differing customer types, time of purchase, etc., is also called Discriminatory Pricing, Flexible Pricing, Multiple Pricing, and Variable Pricing.

What are the 8 factors influencing differential pricing?

Differential pricing is implemented for various reasons, the most important of which are differences in expenses, prices charged, competition amount, demand in overseas markets, and pricing strategy.

What are the types of differential pricing?

When using a strategy known as differential pricing, the cost of the same product is set differently for various customers, depending on factors such as geography, product shape, and so on. The maximizing of profits is the primary purpose of using this approach. This pricing strategy is sometimes referred to as multiple pricing or discriminatory pricing. Factors affecting differential pricing are pricing based on value, updated pricing structure, editions, and various pricing points.

This has been a guide to what is Differential Pricing. Here we explain its types, examples, advantages, disadvantages, and comparison with dynamic pricing. You can learn more about it from the following articles –