Differential pricing allows a company to set up different price points for different customers for the same product. It's also known as "price differentiation" or "price discrimination," and the reasons for the price changes can include location, time of day, season of the year and even product brand. Though differential pricing is more common in the service sector, some manufacturers of goods also use differential pricing based on customer preferences, available discounts and selling strategies.
One method that businesses use to establish differential pricing is granting volume discounts. The volume discounts allow the business to bring in more revenue in a single transaction while granting the buyer a lower price per unit. For instance, if a small shoe store has a sale where the customer buys the first pair of shoes at the regular price and gets a second pair at half price, the store owner sells more merchandise, and the customer gets a bargain.
Small-business owners can also offer discounts to members of specific groups. While it is illegal to offer preferential pricing to members of a religious, racial or ethnic group, business operators can offer discounts to customers belonging to civic organizations or charitable agencies. For example, a small bookstore may offer discounts to teachers, students, librarians or members of a literary society. Conversely, members of a local art museum may receive discounts on art lessons, art books and lecture series.
Hotels, airlines and resorts all employ differential pricing based on the day of the week and season of the year. The travel industry drops its prices during times of low demand and raises them during peak demand periods. A mid-day, off-season hotel reservation at a small boutique hotel is frequently much cheaper than one booked for a weekend during the height of the tourist season. Custom transport services, such as shuttle buses and limousine services, also employ differential pricing based on the season and time of day.
Restaurants, movie theaters, amusement parks and numerous other entertainment venues employ differential pricing practices. Movie theaters offer reduced-price tickets for matinee screenings in an attempt to bring in more moviegoers during daylight hours. Family-owned restaurants often promote lunch specials on many of the same meals they serve during dinner hours. Bars and clubs offer "Happy Hour" drink specials during early evening hours but raise their drink prices for the late evening crowds.