Price Discrimination

Theoretically, this strategy captures the entire consumer surplus, as each buyer is charged a unique price based on their individual demand curve, aiming for the maximum price they are willing to pay. An example is Uber’s surge pricing. The company adjusts ride prices according to real-time demand and each customer’s willingness to pay at that moment.

Second-Degree Price Discrimination  

Sellers offer different prices based on the quantity or version of a product purchased in this case. Costco offers discounts when customers buy larger quantities of items, and Amazon gives consumers access to better deals and free shipping when they subscribe to services like Amazon Prime.

Third-Degree Price Discrimination

Businesses offer different prices to different market demographics or geographic segments. For example, Spotify offers discounted rates to students, while companies like Apple and Microsoft offer education pricing on their products.

Price Discrimination in Ecommerce

In ecommerce, companies use price discrimination to maximize revenue by identifying customers’ purchasing habits, location, or buying frequency and then charging them accordingly. This strategy often takes the form of offering discounts to loyal customers, new shoppers, or those who make bulk purchases. Airlines and hotel chains use dynamic pricing, which changes depending on factors like the time of booking and the level of demand.

Factors Influencing Price Discrimination

Consumer Segmentation

When setting prices, companies like Netflix consider various factors related to their audience segments. These factors may include demographic information, buying behaviors, and geographic location. For example, Netflix keeps its prices below the average in some countries where the purchasing power is lower.

Willingness to Pay

Realizing when people are ready to pay more for a purchase is necessary. Factors such as urgency or perceived value can influence this willingness. For example, during holidays, accommodation and ticket prices often peak since consumers have limited time and are thus eager to pay much for these services.

Market Power  

Companies need to have some control over their pricing to apply this method successfully. Businesses operating in highly competitive markets may struggle to implement this method effectively because of the availability of alternatives. For example, Apple can charge a premium for its iPhones because of strong brand loyalty and limited close substitutes in its product category.

Applications in Business

Revenue Maximization

Segmenting the market and charging different prices can help companies increase total revenue. For instance, Adobe offers different pricing tiers, such as students, professionals, and businesses, based on customer type for its Creative Cloud software.

Customer Loyalty

Customizing prices for different customer segments can be a powerful way to foster customer loyalty. For example, as Sephora does, offering special prices to repeat customers encourages them to return and make future purchases.

Competitive Advantage

If you are a brand that has a wide range of products, targeting shoppers across different segments with differentiated pricing can attract more customers.

Practical Example

A software company sells a cloud-based service, charging different prices based on user profiles. For example, it offers a student plan for $10 per month, a small business plan for $50 per month, and an enterprise plan for $200 per month. Adobe, Microsoft, Canva, and Spotify are some of the companies that implement these strategies in their pricing plans.

Wrap Up

Price discrimination is necessary to increase earnings by charging each consumer segment various prices. Understanding and applying price discrimination can help companies optimize profits while catering to the diverse needs of their customer base. It is particularly effective in ecommerce, where data and technology can be used to adjust prices dynamically based on individual customer profiles and behavior.