What Is Differential Pricing?

Differential pricing is when a company sells a product or a service at two or more prices, although price differences are not based on cost differences. ^[1]

Differential pricing

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Differential pricing is when a company sells a product or a service at two or more prices, although price differences are not based on cost differences. ^[1]

Also known as "flexible pricing", it is a pricing method of "different customers' willingness to pay" to set different prices. The purpose is to establish basic demand, ease demand fluctuations, and stimulate consumption.

Different pricing occurs when a product is priced to different consumers or is disproportionate to its cost in different markets.

E.g:

1. The prices of industrial electricity and domestic electricity are different;

2, make long-distance calls, the price is different during the day and night;

3. Differential pricing of airlines.

Differential pricing requires the following:

First, the enterprise has a certain ability to control prices. Obviously,

1. Differential pricing at one time: The most extreme form of differential pricing, where the enterprise asks for the highest possible price per unit of output. It is rarely used in practice.

Second-degree differential pricing: The incomplete form of first-degree differential pricing, which is priced based on the quantity purchased by a single consumer. Commonly used in utilities (electricity, water, gas, etc.). For example, the United States charges different monthly electricity consumption Q:

1) 1Q 100 kWh, P = $ 0.12 / kWh;

2) 101Q 400 kWh, P = $ 0.10 / kWh;

3) Q> 400 kWh, P = $ 0.08 / kWh.

Third-degree differential pricing: The most common differential pricing. Divide customers or markets according to the price elasticity of demand. That is to say, for markets with high price elasticity, prices are set lower; for markets with low price elasticity, prices are set higher.

The market can be divided according to the following three factors:

1) Different geographical locations: If a product (book) sets different prices in the domestic and foreign markets, domestic prices (small flexibility)> foreign prices (large flexibility)

2) Different product uses: If the telephone users are divided into corporate users and resident users, corporate expenses (small flexibility)> residential expenses (large flexibility)

3) Personal characteristics of consumers: If the film market is divided by age, adult fares (small flexibility)> children's fares (large flexibility)