- 1). Explain the concept of price and demand interactions. As price goes up, the demand for an item will fall because people start to consider it over-priced or are unable to afford the item. Alternatively, when a price is lowered more people may consider the item to be a good deal and purchase it.
- 2). Discuss quantity-based differentiated pricing. In this pricing scheme, the price per unit is lowered when the consumer purchases a higher quantity of items. Examples include wholesale and bulk discounts.
- 3). Discuss differentiated pricing based on other characteristics of a target market. These include age -- senior discounts for example -- and location, such as higher prices in certain states or cities as opposed to small towns.
- 4). Explain that some groups are less sensitive to a higher prices. Take the example of higher prices for airline tickets on in the middle of the week compared to the weekend. Some people must travel on specific days, while others can be flexible. Reducing the price on unpopular days encourages people with flexible schedules to travel on lower-cost days.
- 5). Explain how differentiated pricing increases profits for the company. Profits are highest by charging the highest price each individual customer is willing to pay. However, it is impossible to know what this price is for each person. Instead, differentiated pricing finds ways to charge more to groups of people who will pay more and then charge less to other groups who would not otherwise purchase the product or service.