Page 429 - Marketing Management

406 PART 5 SHAPING THE MARKET OFFERINGS

Differentiated Pricing

Companies often adjust their basic price to accommodate differences in customers, products, loca-
tions, and so on. Lands’ End creates men’s shirts in many different styles, weights, and levels of
quality. As of January 2010, a men’s white button-down shirt could cost as little as $14.99 or as
much as $79.50. 75
Price discrimination occurs when a company sells a product or service at two or more prices
that do not reflect a proportional difference in costs. In first-degree price discrimination, the seller
charges a separate price to each customer depending on the intensity of his or her demand.
In second-degree price discrimination, the seller charges less to buyers of larger volumes. With
certain services such as cell phone service, however, tiered pricing results in consumers paying more
with higher levels of usage. With the iPhone, 3 percent of users accounted for 40 percent of the traf-
fic on AT&T’s network, resulting in costly network upgrades. 76
In third-degree price discrimination, the seller charges different amounts to different classes of
buyers, as in the following cases:
• Customer-segment pricing. Different customer groups pay different prices for the same
product or service. For example, museums often charge a lower admission fee to students and
senior citizens.
• Product-form pricing. Different versions of the product are priced differently, but not
proportionately to their costs. Evian prices a 48-ounce bottle of its mineral water at $2.00 and
1.7 ounces of the same water in a moisturizer spray at $6.00.
• Image pricing. Some companies price the same product at two different levels based on image
differences. A perfume manufacturer can put the perfume in one bottle, give it a name and im-
age, and price it at $10 an ounce. The same perfume in another bottle with a different name
and image and price can sell for $30 an ounce.
• Channel pricing. Coca-Cola carries a different price depending on whether the consumer
purchases it in a fine restaurant, a fast-food restaurant, or a vending machine.
• Location pricing. The same product is priced differently at different locations even though
the cost of offering it at each location is the same. A theater varies its seat prices according to
audience preferences for different locations.
• Time pricing. Prices are varied by season, day, or hour. Public utilities vary energy rates to
commercial users by time of day and weekend versus weekday. Restaurants charge less to “early
bird” customers, and some hotels charge less on weekends.

The airline and hospitality industries use yield management systems and yield pricing,by
which they offer discounted but limited early purchases, higher-priced late purchases, and the low-
77
est rates on unsold inventory just before it expires. Airlines charge different fares to passengers on
the same flight, depending on the seating class; the time of day (morning or night coach); the day
of the week (workday or weekend); the season; the person’s employer, past business, or status
(youth, military, senior citizen); and so on.
That’s why on a flight from New York City to Miami you might pay $200 and sit across from
someone who paid $1,290. Continental Airlines launches 2,000 flights a day and each has between
10 and 20 prices. The carrier starts booking flights 330 days in advance, and every flying day is dif-
ferent from every other flying day. At any given moment the market has more than 7 million prices.
And in a system that tracks the difference in prices and the price of competitors’ offerings, airlines
collectively charge 75,000 different prices a day! It’s a system designed to punish procrastinators by
charging them the highest possible prices.
The phenomenon of offering different pricing schedules to different consumers and dynami-
cally adjusting prices is exploding. 78 Many companies are using software packages that provide
real-time controlled tests of actual consumer response to different pricing schedules. Constant
price variation can be tricky, however, where consumer relationships are concerned. Research
shows it’s most effective when there’s no bond between the buyer and the seller. One way to make it
work is to offer customers a unique bundle of products and services to meet their needs precisely,
making it harder to make price comparisons.
The tactic most companies favor, however, is to use variable prices as a reward rather than a
penalty. For instance, shipping company APL rewards customers who can better predict how much
cargo space they’ll need with cheaper rates for booking early. Customers are also getting savvier
about how to avoid buyer’s remorse from overpaying. They are changing their buying behavior to