[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]
