Pricing professionals have a lot of tricks under their sleeves that keep businesses operating and retain customers at the same time. Some of them work which create loyal customers and further strengthen brand image. While other strategies can upset customers and even push them to switch to competitors. Today, we’ll discuss a method that can either make or break your relationship with customers. What is price differentiation?

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While a total price customisation may seem difficult to achieve for some businesses, there are ways to adapt this practice to your organisation.

 

One of the ways to know your customer’s maximum willingness to pay is to use price differentiation. But when is it fair or unfair to implement this across your product/service portfolio? Well, there’s a delicate balance that businesses need to achieve.

 

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In this article, we’ll be discussing how to implement price differentiation without making customers feel offended. How do you secure and ensure your customer’s privacy when implementing this technique? Or better yet, when is it deemed offensive? 

 

At Taylor Wells Advisory, we believe that investing in your pricing capability while optimising your research and development, working with sales and marketing teams, and transforming data analysis keeps you ahead of the competition.

 

We argue that changing up your pricing from time to time is a powerful tool that puts you at an advantage. And at the end of the article, we show you how to carry this out the proper way.

 

What is price differentiation?

 

Most price leaders can at times confuse price differentiation with price discrimination. So, how can you tell the two apart and navigate a situation like this? And how do you execute it in a manner that doesn’t push customers too far to switch to your competitors? 

 

Price differentiation refers to setting prices that differ and vary for the same product/services depending on customer demographics like location or target market. 

 

With the use of data analysis and artificial intelligence, differentiation gives businesses a leeway for more control over their revenue and margin. Automation trends in pricing and data have also made pricing decisions and the personalisation of marketing strategies achievable.

 

We actually see price differentiation every day. In garage sales and weekend markets, for instance, shoppers get a lower price if they arrive towards the end of the sale. Obviously, this is because sellers want to get rid of all the items they’re selling. 

 

We also see this through customer loyalty schemes where buyers get exclusive freebies, discounts, and other promotional offers. Of course, this type of price differentiation is more favourable towards customers.

 

is it price differentiation or discrimination?

 

In a recent study conducted in Australia, participants joined a presentation of different concepts and examples of price discrimination. And it turns out most people were bothered by this practice. It was irrelevant if they were benefitting from the price differentiation or not.

 

They also felt that, surely, they were receiving lower offers at certain sales periods. But in the time frame that products are set to their regular prices, customer gains in the long-term are actually much less.

 

What’s more interesting is for participating customers who felt they were gaining more from the price differentiation were bothered that other buyers were actually receiving better price deals,

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Disadvantages 

 

Try to recall a time when you found out that a neighbour or friend got a better deal than you for the same product/service. It didn’t feel so great, did it?

 

Most customer dissatisfaction roots from envy of other customers. As consumers, we’re naturally bothered if we aren’t receiving a fair deal. Or if we’re being ripped off.

 

Then there’s the “pink tax” or a type of price discrimination based on gender where women pay more for “feminine” products.  Pricing and marketing analysts say that they’re able to maximise customers’ willingness to pay if products/services appear more feminine (like pink razors, for instance.)

 

The pink tax has even prompted a price equality movement lately. While some countries have already banned it, it’s still evident in kids’ clothing, sportswear, and other feminine hygiene products on the shelves in some states.  

 

As a business, for customers who find out about price discrimination, it can damage customer relationship management and the overall value proposition. And it leaves more customers feeling offended.

 

We’ve talked about price communication before and how important it is to craft the way you let customers know about price changes. 

 

But respecting customers’ feelings, especially for those who are price-sensitive can help mitigate the risks that price differentiation comes with.

 

For instance, years ago, Orbitz charged more for its customers who were transacting through the Orbitz website using Apple devices like Mac. But they charged less for online visitors who were using Windows devices.

 

This practice can be effective for customer segmentation and managing income streams. But it can also pose a risk of serious customer complaints that may eventually result in them switching to competitors.

 

what is price differentiation in customer demographics?

 

Below are some basic rules that we suggest you follow to ensure your price decisions don’t damage your relationship with customers:

 

What are your reasons behind price differentiation?

 

You need to have a good enough reason to employ or differentiate your pricing in a way that puts customers first. 

 

For instance, many establishments set prioritised promotional offers for children and the elderly. We often experience this in amusement parks, cinemas, pharmacies, restaurants, grocery or bulk commodity discounts. And these ultimately benefit the customers.

 

Similarly, businesses do this either to achieve a quick increase in sales volume (seasonal sales.) Or when certain perishable products are almost beyond their sell-by date.

 

Product differentiation 

 

People love it when they have the freedom of choice. And the same notion applies when we shop. As businesses get better at influencing customer decisions, research shows that our neurons spark increasingly as the presentation of choices is made easy.

 

So, customers can instead choose their own terms when shopping for services. How? Most SaaS and telecommunication companies offer a basic version of their services. They also give them the freedom to choose an upgraded or “best seller” version, apart from the premium choice. In this case, higher prices also come with different and better features. 

 

Likewise, buyer behaviour research shows customising the services they pay for actually raises their willingness to pay. Moreover, you minimise the chances of them feeling like they’re being ripped off.

 

Price segmentation done in this way should separate different products. Because the more that it’s obvious to customers that you set different prices for the same products/services, you will also risk losing them out to competitors. 

 

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Predictability in defining what is price differentiation

 

Price changes should have a pattern that customers can predict. For instance, fuel prices are lower on weekday evenings, for instance. And motorists or drivers know this price pattern and are able to plan for their fuel consumption in their favour.

 

As discussed in pricing strategies, most customers will accept price fluctuations as long as it’s communicated well. The hotel, oil, and airline industries often implement this.

 

You can see the difference in ticket prices when you buy in advance. And compare this when you purchase on short notice (a day or two before your flight departure). This is also more obvious during travel peak seasons.

 

Apart from that, a gradual price increase is more tolerable for consumers. This is common during holiday seasons, international events or celebrations, and peak seasons as popular demand increases.

 

Other examples of successful price predictability are common in clubs or bars with birthday celebrant promos. Some educational institutions also use “early bird” offers for their enrollees.

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Bottomline 

 

Once customers figure out that there is price discrimination and conclude that it is because of profit gains, it’s difficult to justify the pricing structure.

 

On the other hand, giving customers control and a reflection or satisfaction of their own choices can help businesses grow their customer base. As a brand, this allows you to regulate and control your customer’s price perception. How? By creating clear pricing policies and refraining from poor pricing decisions.

 

This is where hiring and working with pricing experts come in handy as you aim to set your price points while increasing your market share and value chain.

 

For a comprehensive view on driving pricing strategies to maximise growth in 3 months,

Download a complimentary whitepaper on How to Maximise Margins with Price Testing Methods.

 

Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?

If so, please call (+61) 2 9000 1115.

You can also email us at team@taylorwells.com.au if you have any further questions.

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