I'm trying to decide whether to change my pricing scheme from 'the same price for everyone' to 'a different price depending on which customer you are' (price discrimination / price differentiation). What advantages / disadvantages does this offer me?
Pricing Marketing Sales Business
Our business uses geographic price discrimination whereby our prices are different in one country compared to another. In economic terms we are maximising our profit by considering the different suppy & demand curves of our various markets.
The reason why we can do this is because it is not easy for a customer from one country to purchase our product from another and this is one of the necessary conditions required for price discrimination.
Goods that are perishable can easily be price discriminated across countries (which is why McDonalds burgers cost different prices in different countries) but commodities that can be easily traded, like gold, tend to have the same price everywhere.
Disadvantages Some companies, such as Amazon, have tried price discriminating based on demographic data (thereby selling products at higher prices to more well-off clients and at lower prices to less well-off clients). This received a lot of negative publicity and I believe Amazon no longer use this policy.
A further disadvantage is the opportunity for people to "trick" you by finding a way to purchase the cheapest products - for example, because laptops/PCs are cheaper in the US than they are in the UK, some people have earned money by buying them in the US and then selling them on ebay into the UK.
Advantages On the other hand, sometimes price discrimination is socially beneficial. For example, if a company offers cheaper products/services to students, children and the eldery, they can still maximise profits while providing a social benefit.
If you have the credibility to maintain a priceMore on this here. (Wikipedia link)
discrimination strategy, it is possible to increase profitability. Successful
price discrimination provides the
opportunity to increase your revenue
by selling to segments of the market
that may not have been willing to
purchase before - therefore increasing
your profits as well.
This is a pretty big question. Let me give a few pointers.
Firstly, very few businesses genuinely charge the same price for the same good to all customers everywhere, and there are good reasons for that. For instance,
Conversely, some businesses do indeed charge the same price for the same good to all (or the overwhelming majority) of customers. There are good reasons for that, especially:
However, it's definitely the case that in a world where we expect most goods to be at least visible online, generally available online, and sometimes only existing online, the complexity of managing multiple, complex pricing schemes can be very high. But conversely, the cost of managing multiple propositions constructed from the identical elements, and even multiple brands, can be very low.
So in a great many cases where apparently you are looking at uniform pricing, that may not be the full story. Or you may already have overlooked ways in which price is far from uniform, simply because they have been well-presented. (Or it may feel that the difference is based on something fundamental - for instance, geographic price discrimination across currency boundaries but using more than simply inter-currency rate variation is extremely prevalent.)
It's often a mistake to focus on the largest, most powerful organisations when looking at pricing. However, I think many businesses could learn a lot about how to segment price offerings by examining how Amazon integrates (and in what ways it limits integration of) Marketplace vendors, looked at through a pure pricing lens.
As a final comment, the jargon itself has an effect on decision-making. "Price discrimination" can sound shady, simply because that word 'discrimination' has shifted balance, and we most often hear it in situations where it has negative connotations.
Joels answer on this is still great. It's specifically about software but works for other branches too.
Is this a web startup? I wouldn't do geographic price discrimination if it is. The cost a servicing a customer anywhere around the world is almost a mute point now.
There are much more effective ways you can charge different amounts to different customers
If you are talking about services, price discrimination may be a good idea as long as you can clearly justify why you are chargin a different price: you could argue geographic differences, taxation, but more importantly you could simply say that the service you provided to Mr Smith in, say, New York, is not exactly the same service you provided to Mr Sixpack in, say, Kansas or Nepal (less days or number of hours billed,...).
If you are talking about a product, then things get a bit trickier. Clients can get really mad if they find out about your little price discrimination (the term itself has a horrible negative connotation). A Mercedes S300 is a the same in China or in Russia. You could try to justify your pricing strategy arguing that tariffs are different from country to country, VAT, transport, logistics, warehousing expenses,...
It would be useful if you clarified whether you intend to discriminate upwards or downwards and by how much.