Price discrimination: best practice, or a crime?

Note: I’m not a lawyer, so don’t take any of this as legal advice. 

A recent article in the New York Times got me thinking about how to stay on the right side of the law, while still extracting the most from pricing. 

The article talks about the biggest no-no of pricing: colluding with competitors.  NEVER do this.  Never let your employees do this.  You will get caught and the penalties are severe.   This can get difficult to control with a sales force that negotiates price.  But what about price discrimination?  Is that legal?

Price discrimination…or value pricing?

According to Wikipedia, “Price discrimination is the practice of setting a different price for the same product in different segments to the market.”  From the same article, value pricing is “Pricing a product based on the value the product has for the customer”.  So what’s the difference between these two?  Not much!  Value pricing is a (sensible) subset of price discrimination.  Of course the “D” word gets lots of attention and hints at the need to be careful.

So can I (value) price discriminate?

The rules vary by country, but broadly speaking, price discrimination is fine so long as there are objective criteria behind the differences.  Pricing the same product differently into different industries, geographies, sizes of customers (with varying costs to supply) or user segments is fine.  Pricing differently when the price is negotiated is also generally fine (see below).  Figuring out the value a customer (or customer segment) receives from your products and services and doing this consistently is one of the keys to a high-performing pricing process.

And when is it not OK to price discriminate?

There’s a legal answer and a customer acceptance angle to this.

Legally, predatory pricing is illegal: this is when a company (usually with a “dominant” market position*) tries to drive another company out of the market with low prices.  You should also not vary prices based on spurious factors, such as ethnicity or national origin. It’s both illegal and dumb.

How acceptable price discrimination is in a market can be different by market.  Customers expect “fair” pricing, but what is considered fair can vary.  In the B2C space, few are concerned with airline value pricing, but try selling snow shovels at a premium after a snowstorm and it’s considered price gouging, not excellent value pricing (in fact, it’s both).  Often price discrimination is considered fair when there is something different about the offer, often that drives cost: larger volumes, faster shipping, different service levels, etc.  These price differences don’t need to correlate with the additional cost, but rather with the customer’s perception of value. Changing a market’s perception of what is acceptable price discrimination can take creativity and effort, but may be well worth it.

How can I make my pricing feel more like value pricing and less like price discrimination?

As alluded to above, by varying the offer.  There are lots of ways to do this, including different product specifications (even if the same contents), different size, added services, delivery options, timing, perhaps just the packaging.  The impact on profits is so significant it’s worth thinking this through carefully, especially if your products have very different value by customer segment.

Any readers have examples of innovative approaches to make price discrimination in a market acceptable?   

*  How can you tell if it’s dominant?  Good question!  Often it means a market share around 30% or higher, but that raises the question of what market are we talking about?  Is it narrowly or broadly defined?  Ask your local friendly lawyer.