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Personalization in the prices for each buyer is the core basis of price discrimination. It is normal for sellers to charge different prices from different businesses as it helps them scale their revenue and profit margins. It may sometimes raise concerns related to fairness however, when implemented smartly this strategy can maximize profits and improve overall market efficiency by serving different customer segments differently.
This blog is your guide to understanding the basics of price discrimination, how it benefits the businesses, its downsides and benefits as well as the real-world examples across different industries for a wider view.
What is Price Discrimination?
Price discrimination is the practice of charging distinctive prices for identical goods or services to different sets of customers. This depends on things like the timing, amount, and demographics of the customers. Price discrimination aims to capture more capital based on what each customer can pay after segmenting them for their willingness to pay more or less. The prices are tailored according to the customer’s willingness to pay, which may raise fairness concerns at times but if done properly can bring greater profits.
Understanding Consumer Surplus and Economic Theory
Before diving into price discrimination strategies, it's important to understand some basic economic concepts that make this pricing approach work.
What is Consumer Surplus?
Consumer surplus is the difference between what a customer is willing to pay for a product and what they actually pay. For example, if you're willing to pay $100 for a concert ticket but buy it for $60, your consumer surplus is $40. You got $40 worth of extra value.
In simple terms, it's the "deal" or "savings" customers feel they're getting. When businesses use price discrimination, they try to capture some of this consumer surplus and convert it into their own profit (called producer surplus).
The Basic Economic Principle
In a traditional market where everyone pays the same price, some customers would have been willing to pay more, while others might not buy at all because the price is too high. Price discrimination helps businesses:
- Capture additional revenue from customers willing to pay more
- Make sales to price-sensitive customers who couldn't afford the standard price
- Maximize overall market efficiency by serving more customer segments
Conditions Required for Price Discrimination
1. Market Power (Imperfect Competition)
Your business needs some control over pricing — meaning you shouldn’t be in a perfectly competitive market where all sellers offer identical products at the same price.
What this means:
You must have something unique, such as brand value, product quality, customer trust, or superior pricing technology, that allows you to set prices independently without losing your customers.
Example:
An automotive parts manufacturer using PriceIntelGuru’s pricing intelligence platform gains market power by setting competitive yet profitable prices based on real-time market data, unlike smaller sellers relying only on static price lists.
2. Ability to Segment Customers
You need to identify and separate customer groups based on behavior, purchase volume, or sensitivity to price changes.
What this means:
You should have access to accurate pricing data and customer insights to determine which segments are more price-sensitive and which prioritize convenience or quality.
Example:
An eCommerce retailer can segment customers using PriceIntelGuru’s analytics tools — identifying high-value customers who prefer premium products versus deal-seekers who respond to discounts and promotions.
3. Prevention of Resale (No Arbitrage)
Your strategy must prevent customers who buy at a lower price from reselling to those who would pay more.
What this means:
In digital commerce or manufacturing, preventing resale means controlling distribution channels, monitoring marketplaces, and ensuring authorized pricing practices.
Example:
A consumer electronics brand uses PriceIntelGuru’s MAP monitoring tools to detect unauthorized resellers and price leakages on marketplaces like Amazon, preventing arbitrage and maintaining pricing integrity.
4. Different Price Elasticity Among Groups
Customer groups must respond differently to price changes for price discrimination to work.
What this means:
Some customers are highly sensitive to price changes, while others value speed, quality, or service reliability more than discounts.
Example:
A B2B supplier using PriceIntelGuru’s predictive pricing identifies that small distributors are highly price-sensitive, while enterprise buyers are more loyal and less affected by price fluctuations.
Customer Segmentation Criteria: How to Divide Your Market
Once you know you can use price discrimination, the next step is deciding how to group your customers. Here are the most common and effective segmentation methods:
- Age-Based Segmentation
One of the most widely accepted forms of price discrimination.
How it works: Offering discounts to students, seniors, or age-specific promotions.
Why it works: These groups typically have lower disposable income and are more price-sensitive. Businesses also build long-term customer relationships with students who may become regular-paying customers later.
Examples:
- Online education platforms: Student discounts on learning management software
- Streaming services: Youth plans for users under 25
- Tech retailers: Educational pricing on laptops, tablets, and software for students and teachers
- Geographic/Location-Based Segmentation
Charging different prices based on where customers are located or where they're purchasing.
How it works: Prices vary by country, region, or even zip code based on local market conditions.
Why it works: Different locations have different income levels, competition, shipping costs, and willingness to pay.
Examples:
- International eCommerce: Displaying prices in local currency with region-specific pricing (e.g., charging $99 in the US but £79 in the UK)
- Shipping costs: Free shipping thresholds that vary by region
- Regional promotions: Targeted discounts in specific cities or states where competition is higher
- SaaS products: Country-based pricing for software subscriptions
- Time-Based Segmentation
Charging different prices based on when customers make purchases or use services.
How it works: Prices change based on time of day, day of week, season, or how far in advance customers buy.
Why it works: Demand fluctuates over time, and different customers have different flexibility in timing.
Examples:
- Flash sales: Limited-time discounts during specific hours to drive urgency
- Seasonal pricing: Higher prices during peak shopping seasons (holidays, back-to-school)
- Dynamic pricing: Real-time price adjustments based on inventory levels and competitor pricing
- Early bird promotions: Discounts for pre-orders or early access to new products
- Cart abandonment recovery: Time-delayed discount codes sent to hesitant shoppers
- Occupation/Status-Based Segmentation
Offering special pricing to specific professional or social groups.
How it works: Discounts for military members, teachers, healthcare workers, students, or members of specific organizations.
Why it works: Rewards specific groups while building brand loyalty and goodwill.
Examples:
- Online retailers: Military, teacher, student, or first responder discounts verified through ID.me or SheerID
- B2B eCommerce: Corporate or business account pricing vs. individual consumer pricing
- Professional tools: Special rates for verified professionals (designers, developers, photographers)
- Volume/Quantity-Based Segmentation
Charging different per-unit prices based on how much customers buy.
How it works: The more you buy, the lower the price per unit.
Why it works: Bulk buyers are often more price-sensitive and shop around, while small-quantity buyers are willing to pay more for convenience.
Examples:
- Bulk discounts: "Buy 3, get 20% off" or tiered pricing
- Wholesale accounts: Special pricing for retailers or business customers buying in volume
- Subscription services: Lower per-month costs for annual vs. monthly subscriptions
- Multi-product bundles: Package deals that reduce per-item costs
- Purchase History/Loyalty-Based Segmentation
Different pricing for new customers vs. repeat customers.
How it works: Offering special deals to either attract new customers or reward loyal ones.
Why it works: New customers need incentives to try your product; loyal customers provide stable revenue and higher lifetime value.
Examples:
- New customer offers: "First order 20% off" promotions
- VIP loyalty programs: Exclusive pricing tiers for members (e.g., Amazon Prime pricing)
- Repeat purchase discounts: Email campaigns with personalized discounts based on past purchases
- Referral rewards: Discount codes for both referrer and referee
- Win-back campaigns: Special offers to re-engage lapsed customers
- Willingness-to-Pay Segmentation
Letting customers self-select into different price tiers.
How it works: Offering multiple versions or packages where customers choose based on their needs and budget.
Why it works: Customers segment themselves, and you capture more from those willing to pay for premium features.
Examples:
- Subscription levels: Basic plan vs. Pro plan vs. Enterprise plan with increasing features and support
- Product bundles: Standalone product vs. bundle with accessories vs. complete kit
- Warranty and service packages: Base product price with optional extended warranties or premium support add-ons
Types of Price Discrimination
To target distinct consumer segments and maximize pricing strategies, businesses use a variety of price discrimination tactics. Depending on how it is used and the type of market, each strategy presents unique benefits and difficulties.
First-Degree Price Discrimination
The first-degree price discrimination strategy is where the seller charges the customers the highest or maximum price a customer is willing to pay. They perform data analysis and collect the customer’s data which includes their buying behaviours, patterns, likes and tastes, which allows the sellers to charge them by offering personalized prices for maximized profits.
Take an Example, Online shopping apps keep track of their customer's buying patterns and interests based on which they show them personalized offers and products. That’s done after they know which customer is most likely to pay how much and for what, which allows the businesses to charge greater prices for the same product depending on their customer purchasing behaviour.
Second-Degree Price Discrimination
The second-degree price discrimination strategy involves offering different pricing for distinctly charging the customer for the same good or service. Here the consumers choose for themselves the choice that best suits their budget based on quantity or quality.
An example, the IT companies that provide software services, charge their customers differently and they offer different pricing patterns for different service versions they use such as basic, advanced or premium. This way they modify the budgets for different tiers based on their choices and demands.
Third-Degree Price Discrimination
Businesses use this strategy to charge various customer groups different prices depending on distinctive observable factors like age, geography, occupation or the time of purchase. This method is frequently used in different industries such as hospitality, transportation, and entertainment.
An example: Senior people and armed forces members are offered cheap plane ticket prices in airlines, there at the same time the airline industry employs different prices which include modified plane tickets based on their locations for general people.
How Does Price Discrimination Work Across Different Industries?
Here’s how Price Discrimination Works across different industries:
E-commerce
Price discrimination caters to customers’ requirements in the e-commerce industry, helps businesses maximize their profits, fulfil different customer segment demands as well and enhances customer satisfaction on the whole. As this industry is vast, it is bound to happen that different customer bases will have different levels of price sensitivity.
With discriminatory pricing, e-commerce businesses can easily cater to these varying segmentations. Demand fluctuation and seasonal requirements are the core of this industry which can be fulfilled by allowing businesses to optimize pricing strategy. With effective pricing evaluation, enormous data such as customer browsing behaviour, demographic preference as well as purchase history can be tracked down to tailor the prices accordingly to boost sales.
Taking an example, Amazon is one such e-commerce platform that has a large inventory consisting of distinctive industry offerings, they offer personalized recommendations and offers to their users by analyzing all the factors, which can be achieved only through strategic evaluation of all factors. This is one of the examples of pricing discrimination using which Amazon boosts conversions while staying profitable throughout.
Retail
Businesses use customized pricing as a tactical method of price discrimination in online retail. This method uses individual customer data to determine various prices for the same commodity. To adjust prices to each customer's willingness and ability to pay, online businesses examine browser history, demographic data, and previous purchase activity.
For example, regular customers may be given targeted discounts on products they frequently purchase, which could lead to additional sales by giving the impression that costs have been lowered. On the other hand, because they are thought to be less price sensitive, new or infrequent consumers may notice somewhat higher pricing or smaller discounts.
Automobile
Price discrimination is also adopted by the automobile industry to charge customers varying rates for identical goods. The automobile business is one of the many commercial sectors that employ this pricing technique. Dealers, for instance, determine prices independently of their linked manufacturer using the MSRP, or manufacturer's suggested retail price.
This implies that they can charge customers varying amounts for the same car or set prices that are significantly higher than the MRP. They understand their customer preferences and also provide them with the ideal recommendations based on their budget and requirements, which personalizes their entire experience, helping businesses convert sales.
Dealers may employ market price discrimination tactics in addition to markups, such as tricky marketing tactics, needless and expensive add-ons, or fake trash fees.
Pros of Price Discrimination
Conclusion
The idea of enforcing pricing discrimination may be overwhelming, so don't worry! This is something your business requires and would help you gain maximized profits. It not only increases your profit margins but also gives your price offerings more flexibility. You can implement it easily without having to worry about any changes in your offerings, all you need to do is segment your target audience. This way you get the understanding of who you can charge more and personalize the offerings based on it.
It might be challenging to directly implement price discrimination if you are new to this. However, with PriceIntelGuru’s Price intelligence tool you will gain insights into the market dynamics through constant price monitoring and can adapt different prices based on competitor’s prices with adherence to the legal and ethical considerations.
Therefore, begin increasing your earnings right now with PriceIntelGuru! Request a Demo today and step up your business game right away.
