Price Discrimination
Price discrimination is among the business practices that are used by companies to increase the sales volume and profitability. It entails providing the same products to different markets to ensure maximum sales. Firms engage in different forms of price discrimination, but the main aim of the business practice is to increase the volume of sales and profitability. In the competitive business environment today, the length of time that a company operates competitively is greatly influenced by the nature of business decisions implemented. Below is a summary of an article on price discrimination based on consumer behavior. The summary enhances the understanding of price discrimination in the highly competitive business world.
According to Caillaud & De Nijs (2014), businesses can take advantage of price discrimination concept by rewarding consumers based on their loyalty. The loyalty of consumers is indicated by the number of repeat purchases they make within a given period, and it is mainly a sign of satisfaction with the company’s products. The authors explain that it is companies that lower the prices for repeat clients benefit from more repeat purchases and an increase in the number of new customers. The strategy is effective in increasing the market share of the company in the industry, which is one of the factors that enhance competitive advantage of the company. However, the authors note that price discrimination based on consumer loyalty may not be sustainable in the long run. This is because the increased discounts on the rising number of repeat purchases have the potential to reduce the company’s profitability in the long run. In the short run, the company benefits from increased sales volume and market share, which makes its growth and expansion plans easy to execute.
One of the conflicting issues in the behavior-based price discrimination as discussed by the authors is the parties that should be favored by the price discrimination. Based on the available academic literature on price discrimination, it is evident that the party that should be favored by price discrimination is the new clients not the loyal ones. In support of this argument, the authors explain that the fact that the existing customers are loyal indicates that they are satisfied by the product and are likely to continue purchasing the product even if the prices remain constant. For the new customers, reducing the price level increases the chances of retaining them and attracting more. The study provides evidence on instances where some companies have achieved great success through reducing prices for new clients. A good example is the newspaper companies where prices for new subscribers are lower than the existing and loyal clients. There are also companies such as air transport firms and fitness clubs where the amount charged for new clients is higher than the existing ones.
Although there is adequate evidence that price discrimination in favor of new clients is beneficial, the authors support reduction of prices for the existing customers. They argue that price discrimination in favor of the existing clients helps in overcoming competition through the development of efficient business strategies. The price reduction offered to the loyal clients makes them feel valued and they readily provide the companies with valuable information concerning the preferences of the new clients. The information gathered is used by the company to improve the products or methods of promotion as a way of enhancing productivity.
The study considered a scenario where one firm wanted to increase its market share by attracting its rival company’s customers as it retained its own. In the beginning, the market situation was constant and both firms provided the clients with similar product prices and quality. Later, the company that wanted to increase its market share started providing discount for repeat purchases as a way of attracting the clients from rival company. The market situation changed immediately. At equilibrium, the loyal consumers continued purchasing the company’s products provided that the prices were below the market price. In the long run, the company that used price discrimination strategy gained more benefits in terms of increased purchase volumes by the loyal customers as well as increased market share from rival company’s clients.
Based on the study findings, it is evident that price discrimination works in favor of a company. It allows a company to increase its profitability through high sales volume. The main issue in price discrimination is identifying the parties that should bear the normal costs and the ones that should have reduced costs. The client groups that are highly sensitive to prices are more likely to respond to price discrimination strategies. In my opinion, a price discrimination policy should be based on the price sensitivity of clients. A small reduction in prices for such clients yields a high response in terms of sales made. It is also important to consider the level of competition in the market. As illustrated by the authors, price discrimination can be used as a tool of overcoming competition by attracting the rival company’s clients.
References
Caillaud, B., & De Nijs, R. (2014). Strategic loyalty reward in dynamic price discrimination. Marketing Science, 33(5), 725-742.