Price Discrimination is one of the holy grails of pricing strategy. It involves maximising profit by segmenting customers and charging the maximum amount possible to each customer.
Suppose you are the commercial or revenue manager at a gym. There are typically 2 types of residents in your local area: university students and working couples. Most working couples are willing to pay up to $40 per week for a gym membership. However, students typically can’t afford this and are only prepared to pay $25 per week. If you charge $25 per week to everyone then you miss out on lots of revenue from the working couples. Charge $40 per week and you lose the students.
The solution is Price Discrimination. You can have a standard price of $40 per week, with a discount to anyone who can present a student card. In this way, you can maximise revenue for both groups.
In order for Price Discrimination to be effective, you need to have clearly defined segments and the ability to identify who falls into which segment. Discounts might be applied to pensioners, students, or children. They could be location based (where you live), or time based (discount for booking early) or channel based (discount for booking online) or membership based (discount for members of an organisation).
Sometimes the discrimination is more subtle. For example, airlines try to discriminate between holidayers (who pay for their holiday themselves and have less to spend) versus business travellers (whose fares are paid by their employers). They recognise that holidayers often book well in advance, and fly in the middle of the day, where as business travellers usually book closer to the flight date and tend to fly in the early morning or evening. So the airline will charge more to someone booking a few days in advance for an early morning flight.
Often you can vary your product slightly to appeal to different segments. Suppose you are the revenue manager at a hotel. You might offer a standard room to appeal to the cost conscious guest, and a deluxe room which targets more affluent guests with a larger budget.
The sky is the limit in terms of the ways you can implement price discrimination, it is entirely up to your imagination. And while Price Discrimination is completely separate from Dynamic Pricing, when used together correctly they make a powerful combination.