Explain how differential pricing can benefit a firm

Question

What will be an ideal response?c

Answer 1

Answer: If a supplier serves multiple customer segments with a fixed asset, he or she can improve revenues by setting different prices for each segment. In theory, the concept of differential pricing increases total profits for a firm. There are two fundamental issues, however, that must be handled in practice. First, the firm must differentiate between the two segments and structure its pricing to make one segment pay more than the other. To differentiate between the various segments, the firm must create barriers by identifying product or service attributes that the segments value differently. Second, the firm must control demand such that the lower paying segment does not utilize the entire availability of the asset. The amount of the asset reserved for the higher price segment is such that the expected marginal revenue from the higher priced segment equals the price to the lower price segment. Prices must be set with barriers such that the segment willing to pay more is not able to pay the lower price.

To successfully use revenue management when serving multiple customer segments, a firm must use the following tactics effectively:
• Price based on the value assigned by each segment.
• Use different prices for each segment.
• Forecast at the segment level.