What is Differential Pricing?

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Differential pricing is where you charge different prices for the same product to different customers. It's also called price discrimination. This variable pricing strategy depends on factors like demographics, location and behaviour.  

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Here are a few discrimination pricing examples in action.  

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• The Grand Theatre Groningen adjusted ticket prices based on salary.  

• In his new art show “New Ways of Pricing”, Artist Jan Hoek prices his art by wealth. He offers a standard price, a "normal people" price at 50% of the original, and a "poor people" price at 15% of that.  

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Differential pricing aims to align prices with customers’ willingness to pay. This makes the product more accessible to customers and generates more revenue.

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What are the Types of Price Discrimination?  

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Businesses set prices ideal for each customer segment based on certain factors. You must consider the willingness to pay, buying quantity, or market segment.

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There are 3 types of price discrimination that companies use. With each type, the intensity of price discrimination varies.

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1. First-Degree Price Discrimination (Personalized Pricing)  

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The first degree is also called perfect price discrimination. This happens when a company charges each customer the most price, they are willing to pay. This is common in high-ticket B2B negotiations and industries like consulting. Here, pricing is different for each client according to their needs. AI-driven dynamic pricing in e-commerce and travel use this first-degree price differentiation. But, how? They use browsing behaviour and past purchases to adjust prices.

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2. Second-Degree Price Discrimination (Quantity-Based Pricing)  

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Here, prices vary based on the quantity purchased or the package chosen. But, all customers face the same price structure. Some examples include bulk discounts, subscription tiers, and airline seat classes. Customers self-select their price point based on their needs and willingness to pay.

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3. Third-Degree Price Discrimination (Segmented Pricing)  

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Businesses charge different prices to different customer groups based on demographics. They group customers based on factors like age, location, or occupation. This is the most common form of price discrimination in consumer markets.

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They are segmented pricing due to the group-based pricing. Examples may include student discounts, regional pricing for digital services, and special offers for military personnel.

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But, companies must be transparent and fair to avoid customer backlash.  

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What are some Discrimination Pricing Examples?

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Let’s show you some differentiation pricing examples based on each degree for more clarity.

1. First-Degree discrimination pricing example (Personalized Pricing)

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• Consulting Services: Firms tailor pricing for clients based on project scope and budget. Each client has different requirements and styles of reporting. Service-based companies or Consulting firms tailor prices for each client according to that.

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• Online Retail (Dynamic Pricing): Stores and E-commerce platforms use AI to adjust prices. They use advanced pricing tools to assess customer browsing history, buying behaviour, etc.

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Such companies use these datasets to set optimal prices in real time.

2. Second-degree differential pricing examples (Quantity-Based Pricing)

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• Bulk Discounts: Wholesalers like Costco offer lower per-unit prices for bulk purchases.  

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• Subscription Plans: Netflix, Spotify, and SaaS companies charge more for premium plans. They also add more features for an easy experience.

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• Airline Ticket Classes: Economy, business, and first-class tickets have different price points. This pricing depends on features, demand and the entire experience. Pricing is different for people who prioritise comfort.

3. Third-degree discrimination pricing example (Segmented Pricing)

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• Student & Senior Discounts: Apple, museums, and public transport offer such discounts. It makes their products more accessible to a larger group. This way, they enjoy the product/service while the companies can expand their markets.  

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• Geographic Pricing: Adobe, Microsoft, and Netflix adjust pricing based on a country’s purchasing power.  

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• Peak vs. Off-Peak Pricing: Services like gyms, and theme parks charge more during peak hours. They also offer lower rates during off-peak times.  

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Ethical considerations and regulatory compliance are crucial to avoid perceived unfairness. If done right, these strategies would create a balance in the economy. This way, companies allow more access to their products. At the same time, they expand their market to newer customer groups.

What is the advantage of using a Differential Pricing Strategy?

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Let us guess your key question behind this. Whether differentiation pricing can increase revenue and profits or not, is it? The answer to that is: Yes!

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If your business segments customers based on their willingness to pay, you can:  

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• Charge higher prices to those willing to pay more.

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• Offer lower prices to those who might otherwise be unable to buy from you.  

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This strategy increases both margins and total revenue. That's because it captures more sales from price-sensitive customers while optimising profit from others.

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Additionally, using differentiation pricing needs a thorough market analysis. It helps businesses better understand their competitive landscape and identify pricing opportunities.  

How to Use Differential Pricing – What do you need to know?

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Differential pricing means setting different prices for the same product for different customers. You already know this now. But, how to apply it and why?

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It depends on the customer demographics, location and their willingness to pay. This strategy aims to optimise profits as well as maintain sales volume at the same time.  

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Here are the 4 steps you need to know to develop a solid differential pricing strategy:  

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• Identify market segmentation  

First, you need to identify segment markets. You can segment markets based on many different factors. Simple ones such as age, income or country are the basics. These are common segmentations many brands use too. But, you can opt for more complex segmentations.

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For example, customer interactions with the brand. Consider the question- do consumers buy from you often? You can consider the time of delivery or any of their pain points.  

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• Study competition & identify goals  

When you have identified clear market segmentation, you can start analysing your competition. This includes checking how they cater to the specific needs of these segmentations. Once you have a clear overview, identify the segments from which you must get value and focus on those.  

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• Choosing the right pricing strategy  

Once you identify your target segments, choose the right pricing strategy. You must set a pricing strategy according to the needs and pains of these segments. Are some customers more willing to pay?

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Use a customer value-based pricing strategy for them. Do you want to spread worth of mouth? Then you should have a very good price/quality ratio with a penetration pricing strategy. Or do you want to be the cheapest among your competitors to generate the most amount of revenue? Choose then for a dynamic pricing model based on competitors.  

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• Track your pricing results

After applying new pricing strategies, you should track the results. Numbers tell the tale! Your pricing performance helps you further improve the strategy. This way, your pricing team continues to learn and fine-tune prices.

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Better yet, integrated pricing software allows you to do all this. In Symson, we see this progress as Hyperlearningᵀᴹ. Here, you use the software and learn to improve quicker than ever.

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When and Where to use Differential Pricing?  

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Many companies think that their product is “too common” for differential pricing. Well, think about water. How much are you willing to pay for a cup of noodles when someone sells it in front of the door of your house? Not much. You may be unlikely to buy it since you can make it in your kitchen.

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But how much are you willing to pay for the same cup of noodles when you're in-flight and hungry?

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People have different willingness to pay for the same product in different situations. This is the case with most products. Companies capitalise on people's wants in different settings. This way, you can price either high or low depending on their willingness to pay.

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Our Customer Case: How Symson improved the revenue and profits of a technical irrigation system wholesaler.  

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How does Symson help you Set Differential Pricing?  

Symson’s AI-powered platform makes it easy to set the right price for different customers. Here’s how:  

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• Smart Data Analysis: Symson analyses customer behaviour, market trends, and competitor prices. This helps us find the best price for each segment.  

• Dynamic Pricing: You can adjust prices in real time based on market trends. Our tool analyses demand, stock levels, and customer profiles to suggest new profit.  

• Customer Segmentation: You can group your customers based on various factors. You can group them based on location, and willingness to pay to set custom prices for each group.  

• Competitor Tracking: Keep an eye on competitor offers and adjust your prices. In Symson, you can do this in a whiff. Our Price Watch feature allows you a simple dashboard with all competitor data. You don't need a separate web scraping tool if you have Symson. According to real-time trends, you get optimal price suggestions.  

• Automation with Control: Automate pricing tasks and reduce manual labour. You can work with more accurate data. Use our easy-to-set rules and limits to keep full control of your pricing.

• Test and Improve: Run pricing tests to see what works best and adjust based on real-time results.

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