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Latest Pricing Insights

Price Discrimination

Posted by PriceBeam on May 8, 2019

by Pedro Piccoli Soares, guest blogger.

Disclaimer: please note that price discrimination may be subject to legal constraints in some countries. You should always seek legal guidance when implementing pricing schemes, and nothing in this article should be construed as suggestions to do something illegal.

Many people believe that there is a relationship in Pricing between the cost of a certain product and its price, however, such connection doesn't really exist when taking the customer's point of view. Customers in general, don't buy products thinking about the cost that the supplier had to produce them; besides they don't have access to this information. What brings a customer to render a purchase is the relationship between the price of the product and the perceived value.

That relationship is very simple: If the customer perceives that the value of an item is larger than the price of it, he will proceed with the purchase. On the other hand, if the perceived value is smaller than the necessary amount of money to acquire the product, the purchase will not happen. Therefore, it is necessary to understand the concept of value.

Value is the sum of all of the benefits noticed by the customer when consuming a product or service. Those perceived advantages can be related to economical, functional or emotional / psychological characteristics of the product. Reduction of costs or productivity increases, for instance, can be considered as economical benefits. Better accuracy and speed are reflections of a product that generates functional advantages. A product that increases the consumer confidence, intelligence or that improves his image, is a one that generates emotional / psychological benefits.

All of these can seem easy, however, there is a small detail that makes everything much more complex.

Different customers perceive different values or, in other words, the observed value of a certain product/service is not the same for all the people that consume it. Consequently there is a variation in the Willingness to Pay, depending on who is buying it. If the consumers are willing to pay different prices for the same product, why should we charge them the same price?

Think about this example: your friend shows you the new shirt that he bought and tells you that he paid $100 for it. In that moment you think: "That is too expensive, I would not pay more than $80." At the same time your other friend, that really liked the shirt, is thinking that $100 was a very cheap price and that he would be willing to pay $120. That is one simple example of our daily life and it illustrates exactly what was said previously.

So, by defining a universal price for the item, the manufacturer of the shirt loses sales for customers like you, that would buy the product for a smaller price and, at the same time, it loses margin from customers such as your other friend, who would pay a higher amount of money for the product.

Price Discrimination is one of the main weapons of Pricing to optimize the financial result of a business. We can say that a company uses that strategy when a given product / service is sold to different groups of customers at different prices, for reasons that are not associated to the costs of it. However, implementing that strategy correctly is not something simple.

First it is necessary to understand the customers, to have strong insights on them, about their willingness to pay and about which factors motivate them to a purchase. The economical factors that influence price (internal and external) and pricing rules (discount politics and payment conditions) are also important as well . Psychological patterns of the customer are essential too, including for B2B transactions.

The next step is to segment. Divide your customers in groups according to consumption characteristics that are relevant for your business. Customers that buy daily and monthly; Customers that buy online and in a store; Customers that program purchases and the ones that ask for delivery with urgency; etc. The segmentation is the most important part because you will analyze what factors influence the willingness to pay of your customers. After that, set a price for each perceived value of your customers. An exact price will never exist, but you can vary it, analyzing the price elasticity until finding out which price brings the best result for your company.

By doing this, your company will begin to work with strategic pricing basing on the value that each group of customers notices in their products. Don't forget that, as each group that you segmented sees a value for your product, the communication of value should follow the same logic. The key is to demonstrate the value of what is being sold for the customer in the best way, this is one of the key principles for pricing optimization.

Price discrimination is not anti-ethics and also not immoral, it is just good business for everyone. Flight companies and hotels don't charge the same price for customers that buy in advance and for those that accomplish the purchase on top of the hour. Physical stores usually have higher prices when compared to online stores and big restaurants companies often set different prices in their menu according on the city that they are operating.

Anyway, think about ways of structuring that practice in your company without causing embarrassments or complications with your customers. The idea is that the consumers must not feel prejudiced in relation to other consumer, but that all of them feel as if they are making a great purchase.

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Topics: Pricing, Pricing Strategy, Price discrimination, price differentiation

International Price Differences: The Good, the Bad and the Ugly

Posted by PriceBeam on April 5, 2019

Prices should differ across different countries, but companies must not only reap the benefits (The Good) but also manage the costs (The Bad) and avoid the pitfalls (The Ugly)

Prices are almost never the same in international markets. They vary due to taxes, cost structures, local market needs, currency exchange rates, tariffs, differences in competitive situations and a myriad of other reasons. They even vary because this is the way it has always been. If looking at different industries, consumer products (CPG/FMCG) have more than 100% difference in prices, with even regional differences in e.g. the European Union of up to 50% for the same product. Car manufacturers are well-known for their price differences and even relatively global products such as computer software has had a number of bad PR cases where e.g. Australians would pay twice as much for Adobe software as US customers.

But international price differences are more good than bad. Here is why.

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Topics: Pricing Strategy, willingness to pay, international prices, international pricing

Thoughts on Penetration Pricing

Posted by PriceBeam on January 7, 2019

Businesses may want to reach a large chunk of their respective markets and initiate word of mouth for their product or products. Businesses engage in penetration pricing when they set a low price point for their products and in turn trigger word of mouth and get a wide fraction of the market. This article will examine penetration pricing and help readers understand penetration pricing so that businesses can implement penetration pricing strategies effectively. 

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Topics: Pricing Strategy, price optimization, penetration pricing

10 Ways Price Research Can Help Getting Price Increases Through

Posted by PriceBeam on November 2, 2018

The end of the year remains the time where many businesses plan and execute price increases for the coming year. By how much, when and what product or market scope are then key questions. By getting market facts through price research instead of guessing what are the best areas to increase in, companies can improve the likely success of such increases tremendously. It can help a business get a firm grip on what product features are more important, what customer are willing to pay for a certain product or service, and analyse what competitors are charging for their products. 

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Topics: Pricing, Pricing Strategy, price increase, pricing research

Tariffs and Their Impact on Pricing Strategy in the US

Posted by PriceBeam on October 30, 2018

2018 has been a year where tariffs were a key topic in the news. The US government imposing tariffs on Chinese goods and the Chinese government doing the same to US goods had and will continue to have serious ramifications for businesses. Even though the first round of these tariffs were for steel and aluminium, consumers buy many products that contain steel or aluminium, which also drives the price up of ordinary consumer goods. Tariffs impact consumer goods the most and businesses are left with a tough decision to either hike the prices of their products or reduce their profit margins. This will result in a decline in retail volumes for many companies, with companies such as Pepsi and Coca-Cola having to raise prices for the consumer side in order to cope with the extra costs. Tariffs have seen the average cost of washing machines in the US jump by 17%.

These tariffs imposed by the Trump administration will impact two types of companies:

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Topics: Pricing Strategy, Profit, PriceBeam Updates, willingness to pay, price increase, international prices, fmcg, tariffs

Optimize Lifecycle Pricing with Willingness-to-pay Insights

Posted by PriceBeam on April 10, 2018


Willingness-to-Pay evolves over time

Most products and services experience a development in willingness-to-pay (WtP) over time.

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Topics: Pricing Strategy, pricing research, segmentation, price positioning, dynamic pricing

iPad Launch Price Follows Apple's New Strategic Direction

Posted by PriceBeam on March 28, 2017

Last week, we highlighted the inconsistencies in Apple's product pricing with the very low price for the Apple AirPods. However, this pricing seems to become increasingly consistent, with both the Apple Watch and now the new iPad supporting this pricing strategy. At just $329, it's definitely among the cheaper options on the market.

One theory behind this move is that Apple is trying to win new customers at an early age. And as we know, young people typically has a much lower willingness-to-pay. But as the saying goes "Once you go Mac, you never go back", and that's exactly what Apple is hoping to do: Acquire young customers by offering low prices, and cash in through retention and selling high-margin products to them later in life.
Generally speaking, Apple enjoy great brand loyalty, and a fair share of their customers would not consider buying alternatives to Apple products. Such loyalty takes time to build up, and by offering lower prices for some of its product, Apple can reach young, price-sensitive customers and nurture them so that when they gain significant purchase power, they have a preference for the Apple products.

This strategy is also evident in Apple's education pricing. Not only do they aggressively establish partnerships with universities around the world, they also offer significant discounts to both students and university staff (In the UK you can get as much as £431 off your MacBook!). Note this discount also applies to the university staff, despite their willingness-to-pay is sufficiently high to pay the full price. At first sight, Apple is leaving a substantial amount of money on the table: but it comes with a reward. Not only does it increase students' exposure to Apple products, but it also encourages university professors to use OS-compatible software in their teaching; a significant measure used by Apple to gain and retain customers as a lot of software is only compatible with either OS or Windows (think Xcode and Freeway).

While it seems Apple are leaving their high-margin pricing strategy behind, this is unlikely to be the case. Apple is and always will be about offering top-notch products and it is impossible to target such products at all consumers. More so, the lower pricing is simply a mean to getting new customers in the fold, so they can become loyal Apple customers and buy high-margin products in the future.
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Topics: Pricing Strategy

Life Cycle Pricing: Capturing Value Throughout the PLC

Posted by PriceBeam on March 7, 2017

Far too many companies fail to develop a long-term life cycle pricing strategy that is continuously adjusted across the product life cycle (PLC). Typically, the savvy company will conduct extensive pricing research to find the a launch price that is aligned with their target group’s willingness-to-pay, but then fails to re-evaluate the pricing continuously. This is problematic in two ways: Firstly, you will either be losing out on revenue or leaving money on the table as you fail to take into account the changes in the customer’s willingness-to-pay, and secondly, it will most likely deteriorate the returns on other products in your portfolio. Proper life cycle pricing across both the early, mid- and late-stage of the PLC is absolutely crucial to reap the rewards from the R&D investment.

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Topics: Pricing, Pricing Strategy, Discounting

Price Positioning: Long-Term Effects of Short-Term Strategies

Posted by PriceBeam on February 24, 2017

In a previous article, we argued that you shouldn’t be looking to your competitors when setting your price. While this is true, knowing how your product or service is positioned in the mind of your customer will help you understand how you stand out from your competitors. And if you find your product is positioned pretty similar to a competitor, you can use price positioning as a tool to build a strong USP (Unique Selling Proposition) by setting a new price that is relatively higher or lower than your competitors’.

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Topics: Marketing, Pricing Strategy

Value-Based Pricing: The Secret to Profit Maximization

Posted by PriceBeam on February 20, 2017
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Topics: Pricing Strategy