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 provides special discounts to shoppers who purchase items in bulk, while Amazon lets buyers access cheaper prices along with free delivery after subscribing to services like Prime.

Third-Degree Price Discrimination

Businesses offer different prices to different market demographics or geographic segments. Spotify gives students special discounts. Also, Apple and Microsoft provide lower prices on products for educational purposes.

Price Discrimination in Ecommerce

In ecommerce, online sellers maximize revenue by recognizing customer habits, locations or shopping behaviors to adjust prices. A business often rewards repeat buyers, first time shoppers or bulk orders. The airline and hospitality industry use dynamic prices that change based on booking times and demand levels.

Factors Influencing Price Discrimination

Consumer Segmentation

Netflix and similar companies consider several aspects of audience segments before setting prices. This factors includes demographics, buying behaviors, and geographic location. For example, Netflix maintains the lower subscription costs in regions where people have less money to spend.

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

To create loyal customers, companies need to customize their prices for different customer segments. Just like Sephora, companies that offer special rates to returning buyers really motivate repeat purchases along with continued engagement.

Competitive Advantage

Brands with extensive product lines benefit from differentiated pricing, which attracts customers across multiple groups or demographics, besides increasing the customer reach.

Practical Example

A SaaS provider sets prices according to user categories. The company charges $10/month for students and $50/month for small businesses, next to $200/month for enterprise clients. Microsoft, Canva or Spotify apply such pricing models in practice.

Wrap Up

Price discrimination helps companies to maximize revenue through segment specific prices. Companies that understand customer segments can optimize profits while meeting diverse customer requirements. Ecommerce platforms excel at this approach with the help of data and technology enabling dynamic price adjustments based on individual profiles or shopping behavior.