The more you earn, the more you pay. That’s what Grand Theatre in Groningen has decided for the show “Jandergrouwnd”. Here you can see that the price of the show is differentiated among monthly income (Netto maandinkomen). Higher income leads to a higher entrance fee. This is called price differentiation. Differential pricing has proven to be an effective tool in generating revenue. Not only for cultural institutions but also for all other kinds of businesses.
You may think that a stable margin on your products proves that you are doing well… but for many businesses it is an indicator that their prices are not optimal.
Choosing the right prices for your products is key in markets with a lot of volume and competitors. Without the right price, consumers will not be paying any attention to your product, when they are considering all the alternatives. However, the right price for a product is not always stable, variation can here be the key to success.
What is differential pricing?
Differential pricing is achieved when prices and offers are catered to different customer segments, based on varying factors, such as demography, geography, psychographics and behaviour. For example, the Grand Theatre Groningen differentiated customer segments based on salary.
Another example is artists Jan Hoek, who is selling his art at different price points – official price, normal people price and poor people price. In his new art show “New ways of pricing” Jan Hoek is selling his images based on wealth. The normal people price is 50% of the original price and the poor people price is only 15% of the normal price!
The purpose of differential pricing strategies is to tap into the customers’ willingness to pay and to optimize your pricing to fit the willingness of customers best.
The main question is: “Can differential pricing improve my pricing and increase revenue and profits?” The answer? Wholeheartedly: “Yes”. If businesses segment their customers into different groups, with varying willingness to pay for the same product, they are able to set the optimal price for different groups. This way, prices can be raised for people that want to pay more and customers that are scared away by high prices can be offered lower prices.
On the one hand, differential pricing will lead to higher margins, but also more revenue, as you will also convert sales with people that want to pay less.
Next to increasing revenue and profits, differential pricing also leads to more insights into your competitive market. For differential pricing to work, you will need to perform some kind of market analysis. To make a benchmark and see where potential price differentiations lie. This will make you more aware of the market.
How to use differential pricing – what you need to know:
As said earlier, differential pricing is achieved when prices and offers are catered to different customer segments. Although differential pricing is common for service providers, it is also a very good option for e-commerce and companies that manufacture goods and products.
Here are the 4 steps you need to know to develop a solid differential pricing strategy:
- Identify market segmentations
First, you need to identify segment markets. Segmentation can be done on many different factors. Simple ones such as age, income or country. These are commonly used as segmentations by many brands, but you can also opt for more complex segmentations. Such as interactions with the brand (do consumers buy regular from you?), time of delivery or on pain points.
- Evaluate competitors & identify goals
When you have identified clear market segmentations, you can start with evaluating the competition and how they cater to the specific needs of these segmentations. When you have a clear overview, you should identify for which segments there is still value to be obtained and focus on these.
- Choosing the right pricing strategy
Once you have identified your target segments, you should choose the right pricing strategy accordingly to the needs and pains of these segments. Are some customers more willing to pay. Use a customer value-based pricing strategy for them. Do you want to spread worth of mouth? Then you should have a very good price/quality ration with a penetration pricing strategy. Or do you want to be the cheapest among your competitors to generate the most amount of revenue? Choose then for a dynamic pricing model based on competitors.
- Monitor the results
Once you have implemented your new pricing strategies for different segments, you should focus on monitoring the results. Numbers tell the tale!
When and where to use differential pricing?
We often here from clients that their product is “too boring” or “too common” for differentiated pricing. Well, think about water. How much are you willing to pay for a bottle of water when someone sells it in front of the door of your house? Probably not much since you can just go inside and get it from the tap, for only a few cents.
But how much are you willing to pay for the same bottle when you just ran a couple of miles during the summer… 1 euro? 2 euros? or even more? The fact is people pay have different willingness’s to pay for the same product in different situations.
This is not only the case for water, but almost any product, even yours. Read here how we improved the revenue and profits of a technical irrigation system wholesaler. Yes, indeed this works from commodities such as water, to immensely specific and technical products such as irrigation systems.
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