How to apply price discrimination: 3 pricing theories

How to apply price discrimination: 3 pricing theories

07/26/2021 - Pricing strategy

Applying price discrimination in your dynamic pricing strategy has large benefits in your e-commerce. However, putting it into practice is not always so easy. How can you apply pricing discrimination in your online store without falling into bad praxis? We help you to start it up thought the three price discrimination theories that you can follow for dynamic pricing.

Applying direct price discrimination 

Direct price discrimination is what is defined as first degree. What this really does is offer a price to users in function of what they are ready to pay for the product

How do you know which is to apply the correct value? Well, here the concept of price sensitivity has a lot to do with that. 

The value that the user grants to the product will be your key to offering them distinct price options to every person. For this, you will have to define distinct user groups in function of their perception of the value of the product. Thus, you will have different ranges with potential buyers to which to apply one or the other prices.

This is the formula for obtaining the maximum profit in the product purchase of every user, as the perceived price will always enter your idea of affordable and inclusive spending desired. 

To give an example, it is possible that the same brand proposes different PVPR to their resellers in function of the directed audience. Premium users don’t usually perceive the value of a discount, while more modest audiences are, without a doubt, a claim for purchase.

2 tips for combined price discrimination

This type of price discrimination applies discounts or special prices to a purchase volume greater than average. The objective? Obtain a higher average sales value, maintaining an admissible profit margin for the business when offering units at a lower price.

This type of price discrimination is the most common, as it depends on the greater average of user need to acquire the product, as well as their disbursement capacity and, includes, in some cases, idiosyncrasy of the buyer.

How to know what type of combined price discrimination you can make? Here are two tips: 

  1. Apply the profit margin to individual product purchases and later to set purchases. This way you will be able to mark the minimum income per product and know your strategy won’t fail because of not having cost effectiveness.  
  2. Choose promoted products that are usually bought together or that suppose the reoccurrence of purchase on the part of users. For example, a shaving razor with its spare parts, as they are necessary complements; or various diaper packs of the same size because this covers a specific temporality for parents before the baby grows.
How to apply third degree price discrimination

How to apply third degree price discrimination 

Price discrimination by bias or third degree is the riskiest, as it can be perceived negatively by buyers.  This strategy is based in the creation of user groups following their own characteristics and applying distinct price to each for the same products. 

These groups can be by age, demographic situation or region. How to avoid the perception that your discriminated prices are unjust for some user groups? Well, the key is in transparency: explaining the motives for why your business has to apply a different price is always well received on the part of clients.

For example, it is more habitual to obtain distinct prices in some e-commerce in distinct zones of Spain thanks to the different costs of shipment and tariffs (like in the Canary islands). In addition, it is also more habitual to find distinct price types for member partners of a club or a visiting buyer.   In these cases the compensation can be used by the marketing team by requesting registration who can be loyal later on.  

Any of these price discrimination theories will help you to implement pricing strategies in your online store to maximize your profit. And if you want to go a step further to find the best price to sell your products, have a price optimization software that allows you to establish different user categories that work toward dynamic pricing with discriminated prices.

Category: Pricing strategy

Tags: competition, pricing

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Maria Jose Guerrero
Content Manager

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