Financial Benefits of Selective Pricing

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What is Selective Pricing: Selective pricing is potentially an important aspect of pricing policy. It involves setting different prices for the same product or service, depending on the market in which it is being sold. For example, the same product or service (with or without modifications) may command different prices when sold:
  • In multiple product categories
  • To multiple customer segments
  • In multiple geographic markets

  • At different times and in different market conditions, such as with peak pricing of transportation and electricity

Primary source: QFINANCE Financial Dictionary, Bloomsbury Ltd., 2009.

Price Discrimination: What economists call price discrimination is virtually an identical concept to selective pricing as described above. At its most fundamental level, it involves charging different prices to different individual customers based on their perceived ability and willingness to pay. Moreover, price discrimination and selective pricing, when and where they can be implemented, are ways to maximize the revenues generated by a given volume of sales. It is thus a means for raising profits.

A seller who offers selective discounts as a result of bargaining or based on the customer's perceived willingness to pay is engaging in price discrimination. In the United States, this is an expected part of buying many big ticket items, from large appliances to vehicles to homes. In many other countries around the globe, haggling over price between merchant and customer is the norm in many small ticket transactions as well, such as in outdoor food markets.

Likewise, any customer who asks for a discount is asking for price discrimination in his or her favor. Moreover, the automatic discounts often offered for volume purchases, or as part of a customer loyalty program, also represent price discrimination.

Within the financial services industry, price discrimination is commonplace. Financial advisors, for example, are constantly either being pressured by large clients to grant discounts, or they offer them as a means to entice new clients or new business.

Inefficiency of Cost Plus Pricing: Nonetheless, many businesses engage in so-called cost plus pricing, in which all customers are charged the same. The late business theorist Peter Drucker used to emphasize that customers, both individuals and other businesses, buy products for the benefits that they render, and that the economic value of such benefits vary by the buyer. Thus, a business that needs a certain capital good immediately, in order to avoid a complete shutdown, is likely to place much higher value thereon than another potential buyer who faces no such urgency.

Dynamic Pricing: This concept is a major driving force behind dynamic pricing, which is growing in its acceptance and application. Pioneered long ago by the airlines, it finally is being adopted wholeheartedly in professional sports, for example. In years past, teams typically would charge the same price for a given seat in their stadiums or arenas, regardless of opponent or date. This produced huge opportunities for entrepreneurs commonly derided as "ticket scalpers," who would buy blocks of seats for games that they thought were underpriced, in hopes of reselling them at a profit. Now the teams are cutting into this business by varying their ticket prices in line with the anticipated demand for each individual game, sometimes making a series of pricing adjustments all the way up to the actual game date.

Sometimes these schemes go awry. For example, in 2012 online airline and hotel booking service Orbitz experimented with pricing based on what device the customer was using to connect to them. Specifically, it offered higher prices to those connecting via Macs manufactured by Apple, based on research indicating that these customers generally were more affluent and thus less price sensitive than the users of Windows machines. Discovery of this scheme produced an uproar that forced Orbitz to retreat, with loss of customer goodwill in the process.

Principal Source: "Thinking twice about price," The Economist, July 27, 2013. This essay appeared in the "Schumpeter" column, a regular feature on business economics in the Business section of the magazine. 
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