What is price discrimination and what is it used for?

Price discrimination is one of the most common forms of marketing practice. Undoubtedly, companies are well aware of the benefits of price discrimination. Let's take a look at the term itself in order to know it better.

Price discrimination is a pricing policy in which at the same time the same product or service is sold to different buyers at different prices, and this price difference is not justified by different production costs of this product or service.

While this method allows sellers to increase their profits, price discrimination also raises some equity concerns. This topic is gaining more and more attention from the media and regulatory authorities.

Examples of price discrimination include movie or theater tickets, and public transport. Different prices can be set depending on age groups: children, adults, retirees. Also, the cost of the ticket may vary depending on the day and the time of day. Prices also differ according to the regions in which you purchase the product or service.

Businesses use price discrimination to increase their income

Different industries may offer prices for goods and services that depend on the volume of products purchased. Among the factors that affect price discrimination are: age, location, wages of customers, desire to purchase a product.

Price discrimination uses in several ways. At the same time, it is important to take into account that the information on prices does not go beyond the required group, otherwise conflicts may arise regarding the difference in prices.

Some incentives help to increase market share or revenues. These are discounts, wholesale prices, etc. Sometimes discounts are depending on gender, for example, the sale for women on March 8th.

The well-known coupons are used in retail trade to divide shoppers according to their purchasing power. Often people who collect coupons are more sensitive to a higher price than those who don't. Therefore, by offering coupons, a manufacturer can charge a higher price for price-insensitive customers and provide a discount for those who are more price-sensitive.

It should also be noted that premium products significantly exceed their cost and are more expensive than their counterparts on the market. For example, you might overpay based on brand awareness and reputation.

Industries that actively use price discrimination

This type of pricing is often handled by large companies with a lot of market power. Another important factor is the ability to identify consumer demand and its fluctuations between different segments, understand the reasons, and anticipate future trends. Third, you should beware of overselling and always keep an eye on your goods.

The pharmaceutical industry is a prime example of the use of price discrimination. Drug manufacturers charge higher prices for rich countries and, consequently, lower prices for poor countries. For example, the United States has the highest drug prices in the world. Europeans pay less for the same drugs than Americans. However, the level of salaries and taxes is also different in each country.

Airlines, like the pharmaceutical industry, regularly use price discrimination when they sell tickets. Tickets differ depending on the type of seat on the plane, flight time, and time of year when the desired flight will be operated. Prices can vary greatly both within an airline and between airlines. If you are planning a trip, it is better to look at and compare different airlines and find the most suitable option for yourself.

Wouldn't it be better for consumers if everyone paid the same price?

No, it’s not like that. Let's see why. Each consumer segment has its characteristics and price range that is acceptable. If everything was priced at “average price,” the lower-priced people would never be able to afford it. And those whose earnings are high - will accumulate money. This is the so-called market segmentation. Thus, fixing static prices can lead to market inefficiency on the part of both the business and the client.

The market is so diverse and volatile that companies are starting to use price discrimination to keep making profits. But keep in mind that customer trust is expensive and it's important to build strong relationships with customers. Based on this, use the pricing method that will be beneficial not only to you but also to your buyer. And for this, study your target audience and provide what is needed for each separate segment.