Price discrimination is not as bad as it sounds. All companies practice some form of price discrimination because it is clear that it is one way to drive more sales. Price discrimination is the practice of selling identical products or services at different price points. True, you may be exploiting different income classes to your benefit since consumers that are willing to pay more (or less) fall in different income classes. However, typically price discrimination occurs and is justified because some consumers are not as valuable as other consumers.
Types of Price Discrimination
Quantity discount: Incentivizing and rewarding consumers that purchase in bulk through price breaks. This form of price discrimination is segmenting your consumers into bulk buyers and not-so bulk buyers. For example, Costco offers three forms of memberships: Executive (most expensive), business (middle tier), and Gold (lease expensive).
Location/affiliation discount: This form of price discrimination rewards consumers that are local by enticing them to continue to return through some form of price break – such as a restaurant or local book shop. Sometimes this price discrimination occurs by affiliation – for example, student’s of a local university might receive a discount at the student book store. Stop for a second and think about why this would be beneficial for the school: the visitors that are not enrolled in the local university but walk into the school bookstore are most likely tourists or prospective students. They are willing to pay a higher price for the item since the school is one that the prospective student desires to attend.
Price Sensitivity discounts: Some consumers are willing to pay more for certain products or services because they have deeper pockets. For example, Microsoft Windows price discriminates by offering a corporate licensed copy of windows vs. a personal license. Cable internet services typically charge businesses more than residentials.
Keys to Successfully Price Discriminating to Increase Business Sales
From the examples above, it is clear that the first step to successfully price discriminate as part of your small business marketing strategy and tactics is to understand your consumers. Once you know who your consumers are, you can begin to segment your consumers in a way that is relevant to their purchase behavior. For example, if you own a local floral shop, it might make more sense to discriminate based on quantity discounts or price sensitivity than local/affiliate discounts since you can charge corporations more or incentivitize frequent shopping by utilizing price as a part of your small business marketing strategy and tactics.
The idea of price discrimination is also beneficial to your product strategy. Perhaps it does not make sense for your business to price discriminate based on identical products or services. However, you can leverage the segmentation of your consumers by creating three tiers of products: value, mainstream, and premium. For example, if you own a local bakery, why not bake a mainstream loaf of bread and a premium loaf of bread where the premium loaf contains organic ingredients and/or real pieces of some kind of inclusion?
The goal behind price discrimination and market segmentation is to find a way to entice some consumers to purchase products that are higher priced by driving them to the higher priced item based on their purchase behavior – similar to the bakery example above. In turn, this will increase your business dollar sales since you are driving consumers to products or services that will help you to generate more revenue.
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