Tantalizing Ways Online Retailers Can Use Price Discrimination To Maximize Profits

Marketers can now plot the perceptions of each customer segment, and create different value propositions in which price will play greater or lesser roles. With price discrimination, online retailers can maximize profits by monitoring how the customer comes to their website and collect the top dollar according to perceptions of how much the customer is willing to pay.

 

A common example of price discrimination:

Passengers on the same airplane all pay different prices based on pre-determined (price discrimination) categories, such as the following:

  • More businesspeople travel during the week paying a premium rate for those days;
  • Premium price for premium hours of travel, i.e. flights early in the day and later in the day are less desirable and less convenient, thus lower cost;
  • Whether you travel over a Saturday, which is a lower volume travel time;
  • Choose your comfort level -- economy, business, or first class -- and pay for it accordingly.
  • Did you wait too long to book that ticket in economy? Too late, that quota has been filled; you have to move up to the next tier of available seats and prices if you want to fly that day.
  • Did you pay a premium because you wanted a ticket that’s refundable?
  • Did you book early enough so the airline could predict capacity? You waited, too bad, the price went up as you get closer to the desired travel date.
  • Did you book a slightly wider seat or slightly more leg room for extra $$$?

Whew! Hard to believe you could do so much with one little ticket, right? There’s lots more, and in case you didn’t notice, it’s the same airplane, same flight, but each person has paid based on their particular needs, as the airline maximizes its profits through the use of price discrimination.

How Online Retailers Can Use Price Discrimination To Maximize Profits

Depending on where the customer lives in the world, or even in the same city, online retailers can use price discrimination for products, from hair conditioner to TV sets. The price can be based on where the customer lives, e.g. on High Street (where they’re willing and able to pay more); Middle Street (where they have a top end limit of what they’ll pay for that product); or Low Street, where they will only pay a certain amount, or not buy. Online retailers have this information... and can use it for price discrimination.

How some online retailers are already using price discrimination:

Knowing the route your customer takes to get to your site will clue you about their price sensitivity, as follows:

1. Niche selling. People looking for hard-to-find products or clothing sizes aren’t necessarily looking for a bargain, they’re just relieved and happy to have found the product and pay the asking price.

2. If a product is out of stock at your competitors, your product becomes more attractive and can command a higher price.

3. Online retailers can identify the sources through which customers come to their website -- and price accordingly. For example:

  • If the customer comes via a Comparison Shopping Engine (CSE) search, chances are they’re looking for lowest price, have been comparing, and have come to you for that low price.
  • If the customer finds you during a Google Search, it means they have searched a particular product, found you ranked in the search, and will pay a middle price.
  • If customers come to your site as a result of seeing a review about you, your value and the price are both higher.
  • If the customer plugs your URL directly into their browser, it means they know you and your product and are prepared to pay the price, because they are already convinced, committed, and may even be loyal.

Bottom line:

Through various methods, online retailers can identify their customers based on online shopping patterns and how the consumer approaches them -- and then create different price lines about how much the customer will be willing to pay. Price discrimination is a competitive pricing technique that allows the retailer to charge the right price from each customer. Using this online retailers can maximize their profits and maintain a healthy bottom line. 

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Gilon Miller, CMO

About Author

Gilon is a seasoned marketing, sales and business development executive with over 15 years of experience in the software and Internet business. He is the Founder and CEO of GuruShots. Previously, Gilon was the CMO of Upstream Commerce, VP of Marketing at iMDsoft and Director of Global Marketing at SAP. He earned an MBA at the MIT Sloan School of Management and a BS in Electrical Engineering from Tufts University.
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