Variable Pricing and Price Discrimination

It is not easy to nail the right price points, despite the proliferation of data and increasingly, the tools available.

This is a rather technical subject, but it is worth mulling over if you are a serious student of retail.

First degree price discrimination

1. Individualised Variable Pricing

Retailers would maximize their profits if they charged each customer as much as the customer was willing to pay. (Auction bidding is an example of first-degree price).

Although first-degree price discrimination is legal, it is not always practical

Second degree price discrimination

2. Self-Selected Variable Pricing (Second degree price discrimination)

Markdowns are technically known as second-degree price discrimination – charging different prices to different people on the basis of the nature of the offering.


3. Coupons

Coupons offer a discount on the price of specific items when they're purchased at a store.

Coupons are also considered a form of second-degree price discrimination because price-sensitive consumers are more likely to expend the extra effort to collect and redeem coupons whereas price- insensitive consumers will not.

Coupons are used because they induce customers to try products for the first time, convert those first-time users to regular users, encourage large purchases, increase usage, and protect market share against competition. 

4. Rebates

Rebates provide another form of discounts for consumers off the final selling price. In this case, the manufacturer issues the refund as a portion of the purchase price returned to the buyer in the form of cash.

Manufacturers like rebates because as many as 90% of consumers don’t bother to redeem them (breakage). Retailers like rebates because they increase demand in the same way coupons may, but the retailer has no handling costs.

5. Price Bundling

Price bundling is the practice of offering two or more different products or services for sale at one price. Price bundling increases both unit and dollar sales.

6. Multiple-unit Pricing

This strategy is used to increase sales volume. It is similar to price bundling in that the lower total merchandise price increases sales, but the products are similar, rather than different.

The risk is that customers may stockpile for use at a later time, resulting in no long-term gain.

Third degree price discrimination

7. Variable Pricing by Market Segment

This is an example of third-degree price discrimination and refers to the practice of charging different prices in different stores, markets, regions, or zones (a.k.a zone pricing) – usually in response to different competitive situations in their various markets.