Many companies sell the same product or service to different customer groups at different prices. Price discrimination enables some customers or segments to pay less. This brings in more overall contribution to the company than if one price is charged to all. For example, Indian Railways offers reduced railways fares to senior citizens. Some airlines offer reduced fares to more frequent users of their service or passengers in luxury and economy class pay different fares. Some companies charge reduced prices for larger quantities purchased, or many branded computer sellers offer students and teachers their products at reduced prices. Coca-Cola supplies its coke to McDonald’s at reduced prices. To practice price discrimination for short- term, sales promotion techniques, such as coupons, or short-term discounts etc. are also used. [ Price Discrimination ]
No matter how carefully a product’s price has been set, there would be occasions in a product’s life cycle to change the existing price for a variety of reasons such as need for additional business, product improvement, sales slow down, loss of market share, competitive pressures, economic conditions, and change in government policies etc.
A company may require price increase because of over-demand, and cost inflation squeezing profit margins. Under favorable market conditions, a company raising its brand’s price successfully can earn substantial profits. For example, if the existing profit margin is 3 percent of sales, an increase of just 1 percent in price will mean a rise of 33.3 percent in profit margin if there is no change in sales volume.
Before increasing or decreasing the price of a brand, the company must consider possible reactions of the customers, competitors, and others.
Consumers interpret price decrease or increase in different ways based on their perceptions that vary considerably. Their perception about the price being high, fair, or low has the significant influence on their buying intentions and post-purchase satisfaction. For example, seeing the explosive growth of cheap ballpoint pens, Parker Pen introduced low-priced pens. To say the least, the results were quite discouraging because Parker’s image was inconsistent with low-priced pens. Price decrease may also be perceived as indicating that the product is not selling well, the company is facing some financial trouble, it is not of high quality, or a new model would replace the existing one and the company is trying to clear the existing stocks. An increase in brand’s price could be interpreted that the quality has been improved, or customers really like the brand and consider it offering high value. Many consumers perceive that high-quality products tend to cost more and price increase may become an indicator of higher quality. A careful analysis of price elasticity, company and brand image, availability of substitutes etc. can help the company in determining the possible effects of price rise or decrease. [ Price Discrimination ]