What does differential pricing mean?
Businesses use different prices for the same good or service based on several factors. This is called differential pricing. Some common factors are where the customer lives, when they buy, what they usually buy, how price-sensitive they are, and how much money they have.
Differential pricing is usually done in a few ways by businesses:
Price localization means adjusting prices when doing business in different parts of the country or the world to consider buying power and local competition.
Price discrimination means charging people different amounts based on what they are willing to pay and how often they buy something or something else.
Volume discounts mean giving people discounts when buying any goods or services at once.
Subscription-based pricing means giving savings to customers who buy or subscribe for a long time.
If you want to get new customers or keep old ones, you might lower your prices to match or beat a competitor’s.
Deals that only happen at certain times of the year, like a holiday or end-of-year sale, are called seasonal deals.
Real-time pricing means prices always go up or down depending on supply, demand, and competition.
The difference allows costs to be set by supply and demand in a free market. It focuses on a dynamic pricing model that leads to ongoing price improvement. When used correctly, differential pricing lets companies make the most money by giving each customer the best deal based on the market.
Like words
- Price discrimination
- Different prices
- Easy-to-change prices
- Different prices
- Prices that change
Why businesses use different pricing strategies
These days, things don’t always cost the same everywhere. The costs of doing business are different in different places, and people usually expect most things to cost more or less at different times of the year or in different places.
A business can use differences in prices for several reasons, including:
Encourage people to buy more significant amounts. When you buy a one-year contract up front, SaaS companies give you one or two months for free. This is because they know you will keep using their service for at least a year. Stores and online sellers would rather sell their stock more quickly, so when a customer buys more than one thing, they offer lower prices per unit.
Compete at prices in your area. People in the same area are less likely to buy a product if its price doesn’t match what it costs to buy in their area. One great example of how prices for the same thing vary from country to country is the Big Mac Index.
Take advantage of times when demand is high. Dynamic pricing lets businesses raise the prices of things that people want. Airlines and hotels charge more during busy journey times or events many people want to attend. It also works well when a new “innovative” product is released, like when Apple releases a new iPhone.
Get a base in a fresh market. Sometimes, using different prices is risky when entering a new market. Companies use penetration pricing to get new customers. Once they have a certain number of happy customers and their brand is well known, they slowly raise costs.
What are the pros and cons of differential pricing?
People sometimes call differential pricing “discriminatory.” That word sounds terrible, but differential pricing can benefit both customers and companies when used correctly.
It can be a double-edged sword, though. You can only get the benefits of it if you use it in an equal and fair way. When companies use different prices for different groups of people, it should never look like they are discriminating based on race, culture, gender, or any other protected class.
Differential pricing has many benefits.
Grows the market
One of the four Ps is price, or, more correctly, a price manager. Differential pricing is an integral part of sales and marketing for most businesses. And it’s an essential part of growing the market.
Let’s say Company A sells soft drinks in the U.S., but they saw that people in Mexico search for the product more on Google and social media. They know people in the area like their goods, and they’ve been thinking about growing for a while. But people in Mexico will not pay as much for soft drinks as in the U.S.
Company A needs to change its prices to meet the Mexican market’s needs. Company A can lower its prices and still make money because it costs less to run a business in Mexico than in the U.S. This includes rent, pay, and other costs.
If a SaaS company wants to reach a new type of customer, the same idea would work. Let’s say they’ve made their product better to meet the wants of a particular group of people, like freelancers or small business owners. They could say in their ads that people who fit those descriptions can get a discount or free trial time. In the end, this will help them get more new customers.
It brings in more money.
A dynamic pricing plan makes it possible for businesses to make the most money.
It lets companies use surge pricing, which can help them make a lot of money during times of high demand. Also, it helps businesses better balance supply and demand, so they don’t get stuck with too much product or insufficient cash flow when demand is low.
During the off-season, lowering prices, putting things on sale, or giving special discounts to certain types of customers can bring in new customers who might not have bought otherwise.
Boosts the sales ratio
Differentiating prices affects how the market works right now, so when businesses use it, the sales ratio (cost of sales split by revenue) gets better.
It costs less to get new customers because the sales team doesn’t have to spend as much time persuading people to buy. Additionally, people who buy something during a sale will likely return and make more purchases.
They can move many more goods simultaneously by selling them more efficiently. This is especially true when price changes help them sell to more people in one market.
Improves the way things are made
Differentiated prices lead to more efficient production for stores, wholesalers, and online brands. Inventory costs eat away at earnings when goods stay on store shelves for too long. Almost always, it’s better to sell out.
Price differences are closely linked to changes in supply and demand so that businesses can plan their production to account for these changes. They know when to make more and when to cut back, which removes some of the stress from having too much or too little stock.
Differential pricing has some problems.
Sensitivity to Price
Different groups are affected by price changes in different ways. Some things are also more stretchy. Buyers won’t respond well to changes in pricing plans if the current market price and price flexibility are not in sync.
In every case, though, buyers want the same thing. Customers are less likely to like a price change if many of them exist. For better or worse,
This is especially true for things like food, shampoo, and toothpaste that must be bought occasionally. They would buy these things anyway, in some way. That being said, they want consistent and reliable providers more than anything else.
When subscription services, like streaming and SaaS, try to change their prices too often, they run into the same issue. People who have signed up for the service expect to pay the same amount every month, so any significant change can make them stop using it.
How People See Bias
Customers may think that differential pricing is unfair if it’s not done in a way that helps all of them. This can lead to a “us vs. them” mentality. This could make customers unhappy and cause them to lose faith in the brand.
When you lower prices for a group of people based on their income or social class, the more valuable customers tend to value the product less. In theory, making a product cheaper for everyone is a good idea. However, when businesses do this, they often lose their best users.
Some businesses might be ready to charge less whenever they can, which could make people not want to pay the total price. For the worst, this could make a brand or product look “cheap,” which could turn off customers who have been buying it for a long time.
Effects on the law
People may be angry and take legal action against a business that seems to be using different prices for different reasons that are illegal or not ethical, even if they aren’t. Companies should be extra careful when doing business in foreign markets where different laws may apply.
Making sure that price plans don’t favor one group of people over another is the best way to keep this from happening. Businesses should also avoid unfair and illegal ways of setting prices, like setting prices and charging too little.
Could cause price wars
Companies that offer the same good or service at lower prices can compete with those that use differential pricing. This could lead to a price war, which is terrible for the business’s bottom line.
When this happens, businesses should focus on other parts of their product or service that make it stand out. This could mean better customer service, products or services, more features, or even a new way of charging for things (like tiered plans).
Different types of differential pricing
Based on customer segments
Companies use segment-based difference pricing to attract a specific type of buyer. They’ll give deals to people who meet specific requirements to get more people to come in. This typically includes firmographic information (like company size and revenue) or demographic information (like age, gender, and income level).
This pricing approach is part of a short-term plan to gain market share quickly. People who see it are often told, “This product is for men aged 18 to 35 who don’t have a lot of extra money.”
A company may also give a discount to first-time buyers or a prize for being loyal. Because of this, the company can reward customers who keep buying from them, which can help keep more of them as customers.
Based on time
There are four main ways that time-based prices can work:
Seasonally: Businesses will change their prices based on the time of year. Discounts during holidays or sales events could be part of this.
Periodically: Businesses can also offer limited-time deals or regular discounts to make people feel rushed and push them to buy immediately.
Event-Driven: In this case, businesses run sales in response to specific events, like natural disasters, popular local events (like a music festival), or significant economic changes.
Nearby: People who buy plane tickets months ahead usually get better deals.
Time-based differentials and user segment-based differentials are sometimes used together. Like, a business might give students deals when it’s a busy time for travel.
Based on location
Businesses with multiple stores in different places usually use location-based prices. Because the cost of living changes where you live, so do the prices of goods and services. This means that businesses may change their prices depending on their customers’ location. This is especially true when a business makes its goods nearby.
The price may also depend on how much people want it. It costs much more to send goods to rural or faraway areas than to areas with many people. Because of the shipping cost, many things in Hawaii cost more than they do on the mainland.
Based on volume
People who buy in bulk often get price breaks from manufacturers and wholesalers. Price changes based on volume can be used for both short-term deals (like “Buy 3 get 1 free”) and long-term plans to keep customers coming back (like loyalty points).
Businesses with loyal customers who buy from them often can use this pricing approach. It makes them want to buy more to get the best deal and keeps them as customers for longer.
Based on the brand image
In some markets, some names are just seen as high-end items for some reason. People are ready to pay more for them because of this. Companies that set prices based on brand image often use expensive marketing methods to make their products seem exclusive, like events with famous people or celebrity recommendations.
Setting prices works because it lets businesses charge more without paying more. It also helps customers stay loyal and think the product or service is worth more.
Based on competition
Stores often match other stores’ prices to stay competitive in their market. When prices are different at different stores, customers can often save money by looking around and finding the best deal.
Many businesses also change their prices based on what their competitors do. People tend to follow the crowd when the market goes up or down.
Examples of Differential Pricing
1. Adobe Creative Cloud is an example of a SaaS company.
Adobe Creative Cloud is a set of artistic tools that have different prices for different types of customers. Students and teachers can get over 60% off at the Photoshop and Illustrator sellers. This lowers the price of their service so that people who might not be able to buy it otherwise can use it.
Example 2: Store: Walmart
The biggest store chain in the world uses differential prices based on competition. They have a strategy to match the price of any similar item sold online or in stores like Target. Customers will stay with them instead of going to a cheaper direct rival.
Example 3: Delta Airlines is an airline.
Delta Airlines uses differential prices based on time. Prices for tickets change depending on when they are bought, their demand, and the time of year. For example, booking a flight months ahead of time is usually cheaper than just a few days before the trip. In the same way, prices may go up during busy travel times, like holidays, and down during slow travel times.
Needs for Technology to Carry Out a Differential Pricing Strategy
Data and software run the process of differential pricing. Companies need to buy the right tech stack for price analytics since they are almost impossible without algorithms and automation.
Here is a list of software tools that companies use to use different prices:
- Data centers, SQL databases, spreadsheets, and customer data platforms (CDPs) are some tools that can be used to analyze and display data.
Business intelligence tools that can divide customers into groups
- CPQ software stands for “configure, price, quote.”
- Prices can be set automatically and better with software like a price engine.
- CRM software that can divide customers into groups
- Online shopping and point-of-sale (POS) systems
- Payment gateways and servers for payments that are safe
- Software for managing billing and subscriptions
- Tools for analyzing competitors
- Software for social listening
- Compliance management system (this is built into a lot of billing and subscription services).
- Marketing software (to let people know about changes in prices and deals)
- A tool like Zapier that lets you connect different software programs
