What is Price Discrimination

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Pricing Strategy

489 classificações

IE Business School

Pricing Strategy

489 classificações

Curso 2 de 5 em Specialization Marketing Mix Implementation

Pricing is one of the most important but least understood marketing decisions. Learn and practice concepts, techniques, and get to grips with the latest thinking on assessing and formulating pricing strategies. Analyze how firms attempt to capture value, as well as profits, in the revenues they earn. After this course, you will be able to contribute to the process of formulating pricing strategies for your own products and services, or those of your firm. This course has an additional focus on pricing dynamics and the reaction to and by competitors, taking a highly pragmatic approach and one that is directly applicable to your day-to-day professional life. Martin Boehm - IE Professor and Dean of the Business School with over 10 years experience - will guide you through four modules. We begin with the importance of pricing and how it ultimately can affect the bottom line. Then, we move on to methods to help you decide what is the optimal price for your product; and then price discrimination - should all your products follow the same pricing strategy or should you differentiate depending on the customer segment? Finally, we look at pricing psychology and how you can manipulate customers in order to drive the highest possible price for your product.

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Playing the Pricing Piano or Price Discrimination

What we see in the real world is that companies don't only charge one price for all their products, but rather set different prices for different products with respect to different customer segments. After looking at the benefits of price discrimination (and the significant revenue and profit potential behind it), you will be able to figure out what type and how to implement price discrimination for your products and services.

What is Price Discrimination6:29

Forms of Price Discrimination3:57

Expert Interviews: Alejandro Hermo of Burger King11:50

Conheça os instrutores

Martin Boehm
Professor of Marketing
Dean of IE Business School

[MUSIC]

In this module we're going to talk about price discrimination,

sometimes this is called as well price customization.

The basic idea behind price differentiation is that we're trying to

charge not only one price for our product or service, but

that we're trying to charge different prices for different products and

services, to different customers or customer segments.

Let me give you one simple illustration of price discrimination.

Imagine you're waking up in the morning having breakfast your favorite cereal and

you ran out of milk.

You typically have two alternatives.

Either you just hop across the street go to a convenience store such as 7-11 or

you go to the closest supermarket that might actually require you to take a car.

What we typically see is that the convenience store charges a slight premium

over the supermarket.

And we can actually explain this from two different angles.

The first explanation will be from the perspective of cost.

Being a supermarket means that we're typically outside of the city center

which means cost of space is typically slightly lower.

So that might explain, as well,

why the supermarket can afford giving lower prices for milk to its customers.

But there is, as well, another perspective we can take.

And the perspective has to do with the overall convenience delivered

to the customers.

Just going to across the street to a 7-11 Is obviously much more time efficient,

much more convenient for customers.

And some customers value this added convenience and

are willing to pay a price premium.

So we have already seen that, obviously,

price discrimination is about charging different prices to different customers.

And that can be explained that customers perceive very different value for

the very same product or service.

Think of taste for instance.

We typically have a certain segment out there in the market that

clearly prefers Coca-Cola.

We have typically as well another segment that clearly prefers Pepsi.

That obviously is going to influence not only the value of perception but

at the same as well their willingness to pay.

Another reason might be as well the nature of use.

So that basically means why do we use a certain product?

Just think of Microsoft Excel.

It is very different whether I'd be using this specific software tool in order to

setup a compensation plan for my sales force as a manager, or

whether I'm using Excel in private use in order to keep track of soccer scores.

And a third factor influencing the value perception might be the intensity of use.

Typically we distinguish between light users and heavy users.

We typically would see that their product choices, and as a consequences as well,

their willingness to pay might be very different.

Just envision two different customers.

One customer uses a television set only 15 to 20 minutes a day

in order to check out the news.

Maybe another customer would be using the television set at least five to six

hours in order to watch the latest series and the best blockbuster movies.

We definitely would see that the willingness to pay with respect to a Samsung

television is very much different.

And the last factor that might influence as well

the perceived value of customers is competition.

Increased competition obviously will lead to a reduced perceived value.

While a reduced competition will typically lead to higher willingness to pay, and

at the same time, to a higher perceived value.

Just think of the typical airline offering a direct flight between London-Heathrow

and New York City.

If I'm the only player offering a direct flight,

so having not really any competition, I typically will be able to

reach high prices because my customers have a high willingness to pay.

So we have just seen that customers seem to have very different perceived value for

the very same product.

So this is something that we as marketers can use to our advantage

in order to try to charge for

the very same product different prices in order to increase our profitability.

Let's take a very simple example.

Let's look at a demand curve in the airline industry.

So far we're always trying to pick only one price.

One price only that maximizes either profit or revenue.

In this particular case,

we would see that we cover a nice part below the demand curve.

Nevertheless, we see at the same time as well

that there are certain customers who would be willing

to pay a higher price than the price that we're currently charging.

And we see at the other end of the demand curve that there's certain customers

who are not willing to pay the current price that we're charging, but

would be interested in purchasing our product if we would offer them

a lower alternative, or a lower price alternative in the market.

So let's put price discrimination into practice.

Let's assume we as an airline provider are not only charging

one price per product, but charging two prices.

One simple way of doing this is launching a business class ticket, and

launching an economy class ticket.

In this particular case,

we now see that we're covering a larger part below our demand curve,

and we're reaping additional revenues or additional profits for our organization.

In this particular case we actually see that we are able to increase

our revenue contribution by more than 40%.

As a consequence we have seen multiple airline

executives stating that we should drive more and

more the price discrimination in their particular industry.

Robert Candall, the former CEO of American Airlines,

once said, if you have 2,000 customers on one particular route and

you only have 400 prices, you're short 1,600 prices.

So what he tried to say with this is you should have a unique price for

each individual customer.

We could call it as well the utopia of price discrimination.

[MUSIC]

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