Management

Price differentiation only works with stupid customers

2nd Degree Price differentiation and the consumers

Ok, now let’s look at “Second-degree price differentiation or indirect PD. Here companies offer different deals, which can be combinations of different prices and quantity or prices and quality, to consumers who self select according to their own situations. Companies engaged in the second-degree PD don’t need to dig into consumers’ individual characteristics, their preferences, and so on. We see this type of marketing strategies very often in our lives.” Normally we have three types of 2nd degree PD:

• NON-LINEAR PRICING every unit of the product costs differently

Companies charge the highest price for the first unit and lower prices for the following ones. We see this case quite often in supermarkets, shopping malls etc.: buy more save more. Here consumers will automatically place themselves in different categories according to their budgets and demands.

Additionally, we also have here another type of non-linear strategy two-part tariff. Under two-part tariff, you need to pay a fixed amount regardless of the quantity you purchase and a variable amount proportional to the quantity purchased. We have here examples like telephone tariffs, amusement park entrance, Brita for example, their water filter facilities and the filter itself, etc. The two prices are interrelated. Meaning: consumers will take the two parts together into consideration: their willingness to pay for the WATER FILTER DEVICE will depend on the price they have to pay for the  FILTERS THAT they NEED TO buy later on for the CHANGE. 

• VERSIONING consumers get offered slightly different versions of products

In versioning, companies offer different versions of products at different price levels. These versions may differ in their quality, functionality, flexibility, etc. The best example would be airfares. Airlines face their customers without being able to know whether they are business travellers or tourists. But they do know that business people require more flexibility to rebook or cancel the flights and are more willing to pay more for better services. Let’s look at an example:

Airline chooses prices of first-class (pF ) vs. economy class fares (pE ). such that business travellers choose first-class seats and tourists choose economy class.