Differential Pricing

Offer Higher and Lower Prices

The "law of demand," as illustrated by a downward sloping demand curve, offers a key pricing principle: some customers are willing to pay more than others for a product. Differential pricing is the strategy of selling the same product to different customers at different prices. Consider the pricing behavior at an auction. Everyone has the same information and bids on the same item. As prices increase, bidders drop out. Those who drop out are in essence saying, "I know others are willing to pay higher prices, but I just don't value the item as much as they do."

Differential pricing enables companies to profit from their customers' unique valuations by offering different customers different prices for the same product. At a cinema, customers who paid full price, used coupons, received discounts (senior, student, under 12, AAA) or purchased prepaid discount passes from Wal-Mart can all be sitting next to each other watching the same movie. Offering this spectrum of prices enables cinemas to maximize profits by serving customers with a variety of different valuations.

Differential pricing tactics can be grouped as:

  • Requiring customers to jump hurdles (coupons, rebates, sales, price match guarantees, time in sales cycle, distribution outlet).
  • Customer characteristics (different prices based on where customer lives, readily available traits such as age, affiliations, purchasing history).
  • Selling characteristics (discounts for volume purchases, bundles, different next best alternatives).
  • Selling strategy (negotiation, razor/razor blade pricing, metering, dynamic pricing).

The range of prices created by differential pricing contributes to the pricing windfall with larger margins from higher prices and growth by using discounts to sell to more customers.

The end result of implementing these four strategies is a multi-price strategy. By this, I mean a set of publicly known prices and plans for a company's products composed of: (1) a value-based price, (2) new pricing plans, (3) versions, and (4) a range of prices.