Price Discrimination vs Differential Pricing

The terms Price Discrimination and Differential Pricing are sometimes used interchangeably, and there can be some overlap, but there are some important differences as well.

 

Price discrimination involves selling the same product to different people at different prices. The goal of the seller is to sell the product at a higher price to those that value it highly and are willing to pay accordingly, while also making it available at a lower, but still profitable, price to those that assign a lower valuation.

There are a number of examples of price discrimination in our pricing glossary. Some, like discounting to students, seniors, AAA members are very clean examples. It is clearly the same product being offered at different prices.

One of the best possible examples appears below. The photographs show the exact same DVDs (they aren't slightly different versions or formats – they are exactly the same, even in their packaging) being sold in the same store on the same day for two completely different prices.

Hot Tub Time Machine DVD from bargain bin at a discounted charm priceFight Club DVD from bargain bin at a discounted charm price
Hot Tub Time Machine DVD from alphabetized rack at a premium priceFight Club DVD from alphabetized rack at a premium price

They were just feet away from each other, but they were directed at two completely different kinds of buyers. The more expensive one was placed on the alphabetically organized rack. There it targeted the people who were actually searching it out by name – based on the assumption that since they had come to the store looking for it they must place a higher value on it, and be willing to pay a higher price.

The cheaper one was located in the discount bin near the checkout line. It targeted the buyer who idly flips through the bin while waiting to pay. That person, who was almost certainly not seeking that movie out, likely places a much lower value on it but the store is still hoping to trigger a sale they would not otherwise get with a very attractive price.

How about a midnight madness sale? Again prices are being discounted to those that are prepared to work outside the usual hours, and jump over figurative hurdles in the form of bigger crowds and longer lines. The shopping experience is definitely different but the product remains the same and it seems like a pretty clear cut case of price discrimination where hurdles are used to segment buyers and offer discounts to those that are serious about saving money.

Other examples are a little more fuzzy. An early-bird special at a restaurant typically offers lower prices, and matinees and Tuesday nights usually offer discounted admission at the movies. The food is the same, and the movie is the same... but the experience is different. Eating dinner at 4:30 or watching a movie on a Tuesday with a bunch of noisy kids just isn't quite the same. The experience here seems more important here than it did when simply buying a product – few would argue that atmosphere and experience is a big part of eating out or going to the movies – and it starts to feel like we're dealing with different versions of the same product.

That means we're moving more into differential pricing and product differentiation. Again we have several examples in the glossary section but here is one that is very clear:

example-of-product_differentiation-and-differential-pricing-1
example-of-product_differentiation-and-differential-pricing-2

Multiple versions of a product being sold at five different prices, all right alongside each other. In each case the core product, the movie on an optical disc, doesn't change but the formats, promotional items, and other attributes all change and the packaging draws attention to that. This is a key aspect of product differentiation – if the differences are not perceived by the customer the product is not differentiated – so the seller tries to distinguish each version.

At one end of the spectrum you have the two identical DVDs being sold at very different prices – a clearly defined example of price discrimination. At the other end you have the multiple versions of the movie being sold at different prices in an example of product differentiation or versioning as part of a larger strategy of differential pricing.

In between you have fuzzier examples – things like early bird specials and cheap Tuesdays – where he core product is identical, but the larger experience is different, combining elements of both price discrimination and, because of the introduction of product differentiation, differential pricing.

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