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Most industries and companies change pricing strategies in a volatile manner depending on various marketing environmental factors. Ideally, companies’ pricing strategies are much influenced by the desire to increase corporate profits and cover operating and other costs (Thomas & Maurice, 2010). One of the commonest pricing strategies is the differential pricing strategy or the tiered pricing approach.
Pharmaceutical and airline firms are examples of industries that adopt tiered pricing techniques to share costs among their customers. These firms can drastically change prices in a span of days, moments through differential price sharing methods.
According to Thomas & Maurice (2010) the strategy is based on the notion that customers must not be treated equally, and that firms need to put some efforts on products. Rather than selling products to all customers in similar approaches, a firm tries to classify and categorize its customer in groups and charge different prices to different groups.
Tiered pricing behavior of pharmaceutical and airline firms
Today’s marketing research has primarily focused on the pricing policies and strategies by the organizations. Most researches indicate that organization pricing policies are set based on; existence of price tiers, face value pricing, and discount/ premium variation pricing policy.
Pharmaceutical and airline firms’ products are good examples where this strategy is prevalent and as a profit maximizing technique (Moe & fader, 2008). According to Moe and fader, 2008, tiered pricing is mostly influenced by the ideology of advance purchasing of products by the customers.
They added that, firms in pharmaceutical and airline industries customers provide advance information pertaining to the overall demand, diffusion across consumers and the demand elasticity of their products forcing a more elaborated marketing efforts to differentiate prices accordingly.
For example, airline firms adopt a multi pricing discrimination practice which essentially involves variation of prices dramatically based on timing or hours of purchases. Airlines purchasing in advance by customers also perfect airline price tiers. Pharmaceutical firms’ price tiers are based on medicine quality and better services depending on the income levels or the individual status in an economy.
Yadav, 2010 argue that, price tiers in the medicine and health fraternity is faced with challenging factors on offering quality health provision in most developing countries. In fact, the industry is much cautions in differentiating its prices. In addition, price differentiation in pharmaceutical firms adds another advantage in maximizing profits.
For example, variation on pharmaceutical products depends on incomes of the customer group. Yadav, 2010, further states that, pricing strategies in pharmaceutical companies its challenging firm’s growth and the success in improving access in low and middle earners.
Essentially, recent trends shows that firms in pharmaceutical and airline industries pay much attention to price tiers since its differential is based on economic and demographic characteristics of the target consumers.
Strategically, these industries utilize differential pricing to create more opportunities to serve the minor or the low income categories and still maximizing profits and developing economies of scale to maximize profits. Again, since the industries are socially responsible demanding, tiered pricing enable airlines and pharmaceutical firms to portray and advocate for social responsibility and not enhancing profit maximization.
To reinforce the differential pricing techniques, industries like airline or hotels engages in yield management. The concept refers to situations where firms or industries group customers to facilitate differentiating prices of its products (Shumsky & Netessine, 2002).
Industries practicing this concept are characterized by; expensive storing of products, future demands are uncertain, markets can be segmented, the same products can be perceived differently by customers, and suppliers in the industry are profit oriented.
For example, airline industry can group customers into leisure travellers and business travellers. Similarly, a firm can offer discounted prices and full price to the groups to further segment markets. All these pricing techniques and market segmentation support price differentiation to the same product offering same satisfaction capacity (Shumsky & Netessine, 2002).
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Differential pricing strategies depend on three tiers in the pharmaceutical and airline industry. These ties include class pricing, bulk selling and selling products based on the willingness to pay.
According to the strategy, companies believe that they can increase profits by acknowledging that consumers vary in terms of preferences and lifestyle, tastes, behaviors, income level, and response to marketing mix or geographical categories.
In addition, differential pricing benefit firms to target certain groups of customers such as frequent customers and loyal customers. In such a case, no fixed price is set for the industrial products and the major goal is to maximize profits via sharing expenses in selling products to all customers.
Moe, W. W. & Fader, P. S. (2008). The Role of Price Tiers in Advance Purchasing of Event Tickets. Web.
Shumsky, F & Netessine, S. (2002). Yield Management. Web.
Thomas C. & Maurice, S. C. (2010). Managerial Economics. New York: McGraw-Hill Higher Education.
Yadav, P. (2010). Differential Pricing for Pharmaceuticals. Review of current knowledge, new findings and ideas for action. Zaragoza Logistics Center: SPAIN MIT-Zaragoza International Logistics Program.