Ever wonder why you're charged one price for an airline ticket one day and an entirely different price for the same seat on the same flight a week later? Or why the exact same product can cost widely different prices in different countries? This pricing method is known as the differentiated strategy, and it is a basic tenet of business as a way to gain the most possible profit out of a product or service without changing the product itself.
Differentiated Strategy Pricing
Using a differentiated pricing model requires that you make a single assumption; the same product is worth different prices to different segments of the market if you can make it appear so. To demonstrate, take an airline ticket. For a cross-country flight, the person shopping for a ticket far ahead of time can purchase at his leisure among multiple carriers. With greater choice, price can be a make-or-break purchase decision; therefore, anyone hoping to sell a ticket must adjust the prices to be competitive. Months later, on the day of the flight, someone hoping to buy a ticket has very limited options. Her lack of choice means the airline can charge a much higher price for the same ticket type as the one sold much earlier. While the product remains the same, the ticket browser is a different brand of customer than the same-day flier.
Pricing in a Single Market
The example of the airline shows the differentiated pricing strategy at work. A product or service you sell has the value the market places on it, but that value can change according to circumstances. By breaking the market into segments you can alter your approach according to segment, becoming in a way a niche product, and changing your price accordingly.
Depending on the segment of the market doing the purchasing you can charge a different price based on perceived differences between your product and a competitor's. This is why you can sell a product for a certain amount at a low-end department store, but at a much higher price point at a high-end store. To the low-end customer there is little difference between similar products as the buyer focuses on function rather than non-price variables. For a higher-end market the non-price variables may come into play, and by differentiating yourself from competitors based on those variables price becomes less an issue and customers are willing to pay you a premium that is not reflected in the inherent value of the product itself.
Differentiated Strategy in Multiple Markets
Another common use for a differentiated model deals with international sales. As with the airline example, the value placed on your product can change according to circumstances in the approached marketplace. To maximize your profit potential in each marketplace, you'll need to come up with a price that reflects the worth of your product or service in that market. Treat multiple markets as you would multiple segments in a single market, aiming for a price that the particular market will bear dependent on as many non-price variables as possible. The more you appear to be different and better, the higher the price you can charge.
Choosing a Price
Your price point when using a differentiated strategy is determined much the same as that of any other strategy. The most effective price is that which brings in the most profit. The key to success in using the strategy is in knowing the market, knowing your customer and choosing an approach that sets you apart from competitors, allowing you to charge a premium whenever possible.
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