What Is Differential Pricing?

Differential pricing is the practice of charging varying amounts to sell the same type of product to different groups of customers. It is also known as discriminatory pricing and multiple pricing. Often differential pricing will be used as part of a marketing effort. For example, a product or service may be advertised as costing less for students.

One of the most common reasons a certain group will be charged a lower price is because they are known to have fewer or strained financial resources. Some typical groups to receive differential pricing include senior citizens, children, families, students, and military personnel. This kind of differential pricing is frequently offered by businesses in the entertainment and restaurant industry.

There are several other reasons this kind of pricing may be used, including terms of payment, the amount of product purchased, and when the item must be delivered. A longer payment term may result in the item having a significantly higher price than that charged to the person who finished making payments more quickly. Often a product will cost less per unit if it is purchased in bulk. Even then the price can vary, depending on how much of the product is ordered. If a customer needs fast delivery of an item or service, there may be a different charge for that service as well.

Differential pricing can also be used as a marketing strategy. A company may analyze its customers in order to determine which kind of person is more likely to buy its product at full price. After determining this, the organization can plan sales, promotions and other similar campaigns so that they are not launched when that kind of customer is likely to buy. The goal is to sell as much product as possible at full price and then to court customers who like what the company sells, but do not consider it essential. Then the company will maximize its profits while moving its inventory at an acceptable pace.

Negotiation is another form of differential pricing. This process is especially common in the automobile industry. A dealer will attempt to sell the vehicle at a certain price, while the customer will negotiate for a lower cost. The final price depends upon the determination of each side of the discussion. If the two parties fail to reach a concession, then the concept of differential pricing could lead to a loss of sale.