How to use Price Discrimination Strategies to Improve Cash Flow in Your Startup
Placing cash value on the goods and services sold by an organisation can be a dicey issue. When products are underpriced, the seller loses value and profit, and when a product is overpriced, the seller most likely will lose patronage and revenue.
Hence, determining the appropriate prices for goods and services is a business decision that must be carefully done. And one of the ways to get this right is by ensuring that the pricing strategy is part of the business model with some consideration for price discrimination strategies.
Price discrimination is a strategy where products of an identical nature are priced differently. This variation is a way of creating buying classes for different consumers whose willingness to buy and pay may differ significantly.
This strategy can pay off for a seller. It makes it possible to serve different classes of buyers with varying buying behaviours for similar goods.
Some of the price discrimination strategies that can be factored into a business model to help swell cashflow are:
This strategy requires that the seller have some idea about the paying capacity of each buyer to charge them accordingly.
The idea behind this strategy is to ensure that the seller maximises his income opportunities by charging the full amount that a particular buyer is willing to pay.
To achieve this, the seller could use the bidding process or “how much can you pay” approach to gauge the paying power of the buyer and make sure he doesn’t under or overcharge based on the information received.
Product reversing pricing
This strategy involves creating variations in the versions of products offered to customers and adding price differences in each of the versions.
This could also be done by creating a selling bait with a “freemium” and upselling a satisfied client to a premium version of the product. For example, you could have some free products you give out after which you ask a satisfied customer to pay for a newer and possibly more expensive version.
This strategy can be in the form of giving some price reduction to buyers above a certain percentage or quantity. It could also involve attaching some buying experiences that automatically categorise buyers into different classes according to their paying power. For example, a training company can offer a reduced price for a collective order above a certain number of participants.
This makes it possible for the customers to differentiate themselves by their willingness to pay while giving the seller the opportunity to capture more customers with different paying abilities . They can also introduce VIP session where some extra care and attention is given to participants for a slightly higher fee.
This strategy involves categorising the market according to their perceived paying power and charging them accordingly. For example, most cinemas offer different prices for kids and students.
Also, this can be achieved by way of a period consideration. Your product can be made to go for a cheaper price during low sales period as a way of encouraging sales.
If you sell rain-related products, you could make your pricing cheaper during the dry season as a way of raking in sales at such periods.
Telecommunication firms use this strategy by reducing the tariff for off-peak periods so as to encourage those who can’t afford phone calls at regular periods to still have the opportunity of paying for call time.
You can also offer early bird discounts or something similar to the black Friday experience.
These strategies must be carefully implemented and integrated into a business model having in mind that the business model should determine to price and not the other way round.
Care must be taken to ensure that people who get the product at a lower price don’t resell it at a higher price thereby profiting from the arbitrage opportunities that price discrimination can create especially in the long run.
If these strategies and similar ones are properly thought out and implemented, it will help increase the cash flow in your business.
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