Dynamic pricing strategies can help you attract more customers and increase profits. One effective strategy is dual pricing. However, it's important to fully understand how dual pricing works and be prepared to handle any challenges that might come up when you start using this strategy.
Dual pricing is a strategy for setting different prices for the same product or service in other markets or purchase conditions. For example, a company might charge a different price for online purchases than in-store prices or offer different rates for domestic versus international customers. This can help maximize profits and better target different customer groups, but it also requires careful management to avoid customer dissatisfaction or legal issues.
In certain scenarios, dual pricing may be rational, while it can be notably counterproductive in others.
Why use dual pricing?
Companies often consider dual pricing when their goals include:
- Maximizing profit in a specific market
- Filling capacity
- Capturing willingness to pay
Maximizing profit
Companies have the potential to increase their profits by implementing a dual pricing strategy. You can set different prices for different customer segments. Different segments will have different willingness to pay, making dual pricing a simple way to ensure more profit.
By capturing more profit from customers willing to pay more, you maximize the value you can get from each customer segment.
Filling capacity
Dual pricing can help some companies fill their capacity by attracting more customers at key times. This is a crucial benefit for companies with fluctuating demand. So, it is often used in the travel industry.
Dynamic pricing, a more advanced form of dual pricing, allows you to adjust prices dynamically. Price adjustments are based on:
- Demand
- Time sensitivity
- Different customer segments’ willingness to pay
- Inventory levels
Dual pricing ensures a more optimal revenue and a fully utilized capacity when done well.
Capturing willingness to pay
Dual pricing can be used to:
- Test willingness to pay by customer segment
- Optimize profits by charging each segment the most they are willing to pay
By segmenting your pricing strategy, you can cater to additional market segments.
New and international markets
A simple case of market expansion may lead your business to consider dual pricing. When entering any new market, it’s important to gain customer trust to make a mark—that way, you can attract and then retain new customers.
At the same time, expansion will lead to additional distribution costs. Dual pricing can be applied to offset the drain.
Implementing a successful dual pricing strategy
Dual pricing strategy calls for research in several categories. By conducting this research, you can initiate a data-driven approach to dual pricing.
Market segmentation
First, you need to understand the distinct groups of customers. Each market segment has unique:
- Needs
- Preferences
- Price elasticity
Dual pricing relies on a deep understanding of each market segment, which will require a different pricing strategy.
Price elasticity
How sensitive are your customers to price changes?
The answer will likely vary considerably by customer segment. However, understanding your customers’ price elasticity is crucial for dual pricing strategies. Next, gauge how demand will change due to price changes. This enables you to maximize your revenue by capturing the highest prices in each segment.
Data analysis
Data analysis enables you to establish dual pricing with insights into:
- Customer behaviours
- Customer preferences
- Purchase patterns
These data points offer additional context on customer segments. You can then continue to analyze the results of changes over time, moving toward the optimal price point.
Value proposition and value communication
At Simon-Kucher, we recommend a value-centric approach to pricing. Value proposition and communication play key roles in dual pricing strategy.
A value proposition communicates the value customers expect from a purchase. In dual pricing, the key is communicating the value you deliver to each segment and at each price.
It is crucial that each customer understands the reasoning behind their charges. They should grasp the price and be convinced it's justified.
Dynamic pricing
Dynamic pricing involves making real-time price adjustments as you react to changing circumstances. Prices are adjusted to address changes in the following:
- Demand
- Time sensitivity
- Competitive pressure
- Inventory levels
With a dynamic pricing strategy, you can optimize your prices to match these fluctuations and maximize revenue.
Dynamic pricing strategy is usually a key part of dual pricing. We can help you implement a dynamic pricing strategy that is always up to date with the changes that affect your bottom line.
Personalization
Personalization means tailoring your products and services to the specific needs of customers. In dual pricing, this means your company can offer customized pricing plans based on:
- Purchase history
- Behavioural analysis
- Demographic data
Using this data, you can maximize customer satisfaction.
The competitive landscape
Understanding the competitive landscape includes a deep dive into:
- Competitors’ pricing strategies
- Market position
- Value positioning
Dual pricing challenges
The main pitfall of dual pricing is the complexity and confusion of implementing it and customer perceptions. If you aren’t careful, you can create a perception of unfairness among customers. This can lead to reputation damage and dissatisfaction.
You may also face challenges from competitors. Aggressive dual pricing strategies in new markets can lead to suspicion, price wars, and other issues. This is generally risky and should be avoided.
However, the legal risks are most important. You must ensure your dual pricing strategy does not violate anti-discrimination or anti-competition laws. These laws vary by jurisdiction, and neglecting them can come at a very high cost.
In addition to all of this, there is a lot of room for costly errors. For example, improper customer segmentation research and implementation can lead to an expensive mismatch.
Simon-Kucher's competitive analysis and benchmarking approach is a cornerstone of our strategy consulting services. Our methodology is designed to help you navigate and excel in the competitive landscape, driving long-term growth through strategic pricing.
Our experts are always happy to discuss your issue. Reach out, and we will connect you with a member of our team.
