Price Discrimination Insights: Strategies, Types, and Real-World Examples

The way you set prices can make a big difference in how your products sell and how much profit you earn. In smaller markets, customers have varied budgets and buying habits, so a single fixed price may leave potential revenue untapped. 

Price discrimination is a smart technique that allows you to charge different prices based on what customers are willing to pay. Businesses using this method can see around 5% greater revenues compared to one-price-for-all approaches. 

Even small changes, like offering bulk discounts or creating basic, standard, and premium product versions, can boost sales and profits. Let’s see how this strategy works in real business situations. 

What does Price Discrimination Mean in Business Terms?

In business, price discrimination occurs when different groups of customers are charged different rates for the same product or service. The product or service remains identical, but prices vary so the seller can maximise revenue from each customer group.

What are the Types of Price Discrimination Businesses Use?

Businesses use three main types of price discrimination to increase revenue:

1. First-Degree (Personalised Pricing)

Each customer is charged the maximum price they are willing to pay. This requires understanding their income, habits, and spending capacity.

Example: A car dealer negotiating a different price with every customer.

2. Second-Degree (Product Versioning/Bulk Pricing)

Prices vary based on the amount a consumer purchases or the product version they select. You can offer discounts for large orders or build many product variations, such as basic, standard, and premium.

Example: 

• Buy-one-get-one-free deals
• Bulk discounts at stores 
• Cheaper mobile plans for limited usage

3. Third-Degree (Group Pricing)

Different prices are set for different groups based on age, income, or location. This method is the most common and easiest to implement. 

Example:

• Student Discounts at the movies. 
• Senior citizens get tickets at lower prices.
• Medicine prices are different in richer vs. poorer countries. 

How do Brands and Companies Use Price Discrimination?

As a seller, you can use price discrimination to earn more from your products. Here’s how brands use this strategy: 

• Divide Customers into Groups

Look at who your buyers are and categorise them based on their age, income, or purchase volume. Knowing your consumer groups helps identify who can pay more and who needs lower prices.

• Understand Paying Capacity of Each Group

Understand your clients’ purchasing behaviour. Some people will pay full price for convenience or quality, while others hunt for deals or cheaper options. Adjust prices accordingly.

• Use Product Version or Offers:

Create multiple versions of your product, like basic, standard, and premium, or provide special deals like buy one get one free, loyalty rewards, or early bird discounts. 

• Adjust Prices based on Data:

For online sellers, use purchase history, location, or browsing behaviour to dynamically set prices in real time.

Real-World Applications of Price Discrimination

Here are some real-world scenarios showing how businesses apply price discrimination to maximise revenue and cater to different customer segments:

1. Airline Ticket Pricing (First and Third-Degree)

Airlines follow dynamic pricing by charging different prices for the same seat based on booking time, loyalty, or location. A last-minute business traveller may pay more than a leisure traveller who booked months in advance, maximising revenue from different customer segments.

2. E-commerce Platform Personalised Pricing (First and Second-Degree)

Online stores adjust prices based on browsing behaviour, purchase history, and location. They also offer discounts for bulk purchases or subscriptions, so customers pay according to their willingness and buying habits.

3. OTT Platform Subscription Plans (Second and Third-Degree)

Streaming platforms provide tiered pricing plans with varying features like video quality or number of screens. Prices differ by region to match local purchasing power, making services affordable while optimising revenue.

How can Retailers Decide if Price Discrimination Fits their Model?

Before using price discrimination, you must ensure it actually works for your business. 

• Check Market Power: Make sure your business can control prices. In highly competitive markets, this strategy may not work.

• Create Groups Among your Customer Base: Now you have to analyse your customer base and decide whether they can be clearly divided into separate groups. 

• Determine Demand Elasticity: Analyse how customers respond to price changes. Some groups may continue buying even at higher prices, while others will only purchase at lower prices. Understanding these differences helps set prices that maximise revenue for each segment.

• Capable of Preventing Resale: Make sure cheaper products aren’t sold to customers who normally pay more. This keeps your pricing strategy effective.

• Estimate Profit: Compare how much profit you could earn with this concept of different prices. 

• Consider Implementation Costs: Factor in time, tools, or technology needed to manage segmented pricing effectively. Determine whether you can take up the cost of implementing the method. 

When does Price Discrimination Fail to Deliver Results?

Price discrimination can fail if the necessary conditions for charging different prices to different groups are not met. Here’s why it can go wrong: 

• Cannot Separate Groups: The method won’t work if you can’t separate your customer base into groups that have different spending patterns or react differently to price adjustments.

• Resale and Arbitrage: If customers buy products at lower prices and resell them to higher-paying groups, the price difference disappears. This undermines profits and nullifies the strategy.

• High Costs of Separation: It can be costly to develop and manage systems for customer separation, price monitoring, and rule enforcement. If these costs exceed the additional profits gained, price discrimination will not work. 

• Customer Switching and Limited Information: If customers can easily switch between pricing categories or if the business lacks accurate data on their willingness to pay, it becomes impossible to set the right prices for each group.

• Legal and Ethical Limits: Some laws or public opinion may prevent price discrimination. If your pricing is seen as unfair or targets a particular group, it can raise legal and ethical concerns.

How can Shiprocket Checkout Simplify eCommerce Payments?

Shiprocket Checkout is designed to make your selling journey easier by giving buyers a fast and smooth checkout experience. With one-click checkout and smart autofill, orders are placed quickly, reducing errors and cart drop-offs, which helps you close more sales.

Sellers gain better control over COD and RTOs by using data-driven insights to decline risky COD orders, offer discounts for prepaid payments, and apply small COD charges, protecting revenue.

The platform integrates seamlessly with Shopify, WooCommerce, Magento, or custom websites. AI-powered tools track buyer behaviour, recover abandoned carts, and boost prepaid orders, improving conversions and operational efficiency.

Conclusion

Pricing is not just about the number on your product. It can be used as a smart tool to grow. By using price discrimination thoughtfully, you can match your prices to what different customers are willing to pay, making your products more accessible without leaving revenue on the table. 

The key is to stay fair, avoid targeting any group unfairly, and focus on value. When implemented correctly, this approach can boost sales, increase profits, and help you build stronger, long-term relationships with your customers.

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