Dynamic Pricing and Price Differentiation
Innovation & New Business Planning - TUHH Institute of Innovation Marketing & Institute of Entrepreneurship, Hamburg · part of my Technology Management MBA · study notes for revision.
The first part of the pricing session treats a price as a single number you have to find. This second part takes that number apart. It makes two claims that sound obvious and are constantly ignored in practice: the right price changes over time, and the right price is not the same for every buyer. The deck’s own opening line for the section is that when you set your immediate or first price you already have to reckon with the fact that prices can, or even must, change later.
Those two claims give the section its two halves. Sub-section 2.1, dynamic pricing, varies the price along the time axis, mostly along the product life cycle, and its two named strategies are skimming and penetration. Sub-section 2.2, price differentiation, varies the price across buyers and buying situations at the same moment in time, and its content is a map of the criteria you are allowed to differentiate on, plus an exercise on two industrial tapes and a comparison of free trial against freemium.
The link between the two halves is willingness to pay. Any market contains people who would have paid much more than your price and people who were priced out by it. A single uniform price collects neither group properly: the first group hands you money you left on the table, the second group hands you nothing at all. Skimming harvests that spread over time, walking a high entry price gradually downwards. Differentiation harvests it at once, by charging different people different amounts on the same day. The deck says this most plainly in its list of skimming advantages, where the whole point of entering high and coming down is described as gradually skimming off consumer willingness to pay.
1 · Two ways to stop using one price
Section titled “1 · Two ways to stop using one price”- The same customer would face a different price if they bought a year later
- Driven by the product life cycle, by competitors arriving, by costs falling and by elasticity changing
- Two named strategies: skimming and penetration
- Key insight: the price that is optimal for one period alone is not the price that is optimal over the whole life cycle
- Two customers buying on the same day pay different amounts for the same thing
- Driven by who they are, where they are, when and how much they buy, and through which channel
- Sorted by whether the customer can or cannot adapt by their purchasing decision
- Key insight: the criterion has to be one you can actually enforce
2 · What makes a price move: the dynamic determinants
Section titled “2 · What makes a price move: the dynamic determinants”The framing slide, credited to Simon (1992), groups the forces that push a price around into three families. They are families of determinant, not a sequence of steps.
| Determinant | What actually changes | Consequence for the price |
|---|---|---|
| Product life cycle | The market moves from introduction through growth into maturity | The price appropriate at launch is not appropriate at maturity |
| Competition dynamics | Imitators and substitutes arrive | Your room for a premium erodes as alternatives appear |
| Effects of changes in price | A price cut raises the sales volume | Every price is also a volume decision |
| Changes of price elasticity | Buyers become more price sensitive as the market’s life cycle progresses | The same cut buys you more volume later than it does early |
| Carry-over effects | Volume today produces volume tomorrow through references, habit and installed base | Today’s price is partly an investment in tomorrow’s demand |
| Cost dynamics, the experience curve | Unit costs fall as cumulated production volume grows | Selling more today makes tomorrow’s costs lower, which makes tomorrow’s prices sustainable |
The deck then puts up the product life cycle curve with a single question mark placed at the introduction stage: what price do you set here? Everything that follows is the answer to that question.
3 · Skimming versus penetration
Section titled “3 · Skimming versus penetration”- Enter at the highest possible price level
- Accept fewer sales at that higher price, in exchange for higher margins
- Then reduce the price gradually, both to capture a larger market share and to respond to competition as it arrives
- Price below comparable products from the start
- The aim is market share and fast growth, not margin
- Once a large installed customer base exists, the price may subsequently rise
What each one buys you.
| Advantages of skimming | Advantages of penetration |
|---|---|
| High profit margin | High sales volume |
| Quick amortisation of R&D costs | Building a leading market position with a high market share |
| Exploiting a monopolistic situation, gradually skimming off consumer willingness to pay | Benefiting from static economies of scale and from dynamic experience curve effects |
| Room to lower the price later in the product life cycle | Sending discouraging signals to potential market entrants |
| A higher price supports a higher perceived quality |
When to apply which. This is the more examinable slide, because it turns the choice into a checklist rather than a preference.
| Choose skimming when | Choose penetration when |
|---|---|
| You have a genuine innovation and can offer it to early adopters with high willingness to pay | You are offering an imitation to price-sensitive customers |
| You can create entry barriers against followers, through IP protection or switching costs | You are in a network goods market, the winner-takes-it-all type |
| The market has short product life cycles, so there is no time for a slow climb | Economies of scale and learning curve effects are significant in your product or service category |
| Quality is uncertain in the category, so the price itself works as a quality indicator |
Notice how neatly these conditions line up with the adoption and diffusion chapter. Skimming is a strategy aimed at the innovators and early adopters, the first 16 percent, who buy on novelty and are not comparing total cost of ownership. Penetration is a strategy aimed at a mainstream that has already decided the category is worth having and is now shopping on price.
4 · Dynamic-optimal prices are not static-optimal prices
Section titled “4 · Dynamic-optimal prices are not static-optimal prices”This slide is the theoretical heart of 2.1 and its title is written as an inequality: dynamic-optimal prices ≠ static-optimal prices. A static optimum is the price that maximises profit in the current period, taken on its own. A dynamic optimum maximises profit over the whole life cycle. They differ because four effects link today’s price to tomorrow’s profit.
Positive carry-over effect An increased sales volume today implies a higher sales volume tomorrow
Effects of changes in price A decrease in price increases the sales volume
Price elasticity Price elasticity increases during a market’s life cycle
Experience curve effect Unit costs decrease with growing cumulated production volume
Read the four together and they point the same way. A lower price today sells more units; more units today mean more units tomorrow through the carry-over effect, and cheaper units tomorrow through the experience curve. A price chosen with only this period’s profit in view therefore sits too high to be life-cycle optimal, because it ignores the volume it is failing to bank for later. The third effect adds the timing: since buyers get more price sensitive as the market matures, the same discount is a blunter instrument early and a sharper one late.
5 · The criteria you may differentiate on
Section titled “5 · The criteria you may differentiate on”The differentiation slide is a single map, and the axis that organises it is not the criterion itself but whether the customer is able to adapt by their purchasing decision. That is the deck’s own wording and it is the most important thing on the slide.
- Customer value - revenue growth, loyalty, the classic A, B, C customer classification
- Sub-markets or groups of customers - a whole defined segment gets its own price
- Individual customers - based on their willingness to pay and their value perception
- Regions or national markets - set according to the regional demand level, purchasing power, degree of competition and cost of serving
- Quantity-based - discounts and bonuses for buying more
- Time-based or demand-level based - time of day, season of the year, that is yield management, as done with flight tickets and hotel rooms
- Distribution channel or point of sale - for example internet versus personal selling
| Criterion | What varies the price | The deck’s example or note |
|---|---|---|
| Customer value | How valuable the relationship is, in revenue growth and loyalty terms | Classifying accounts into A, B and C customers |
| Sub-markets or customer groups | Membership of a defined segment | A whole group of customers priced as a block |
| Individual customers | That single buyer’s willingness to pay and value perception | The finest possible grain of differentiation |
| Regions or national markets | Where the buyer is | Regional demand level, purchasing power, competitive intensity, service costs |
| Quantity | How much they buy in one go | Discounts and bonuses |
| Time or demand level | When they buy, and how loaded the capacity is | Time of day, season of the year, yield management, flight tickets, hotel rooms |
| Distribution channel | Which route they buy through | Internet versus personal selling |
Yield management deserves the extra label because it is dynamic pricing and price differentiation at the same time. The hotel room price moves with the calendar and with how full the hotel already is, which is the time axis, and it simultaneously separates the guest who books six months out from the one who walks in tonight, which is the buyer axis.
6 · Why the two rows behave completely differently
Section titled “6 · Why the two rows behave completely differently”The top row of the map only works if the customer genuinely cannot slide into the cheaper category. The moment they can, the whole structure collapses to the lowest price you offered, and you have simply run a discount.
The two rows achieve that barrier in different ways, and it is worth being explicit about the mechanism, because it changes what you have to build.
- Top row, identity and geography. The separation has to be verified. Being an A, B or C customer, belonging to a defined customer group, being that one negotiated individual account, or being in a particular national market are all things somebody has to check and enforce. Where the check is weak, the scheme leaks. Regional pricing in particular only holds as long as the customer really cannot simply buy in the cheaper market instead, which is exactly what the deck means when it puts this row on the side where the customer cannot adapt by their purchasing decision.
- Bottom row, behaviour. Here you deliberately let the customer choose, and the separation is self-enforcing because the cheap price carries a real cost for the buyer. Taking the quantity discount means committing to a bigger order. Taking the off-peak price means travelling at an inconvenient hour or booking months ahead. Taking the internet price means giving up the personal selling that a demanding buyer wanted in the first place. Nobody has to police anything: the customers who value convenience most sort themselves into the higher price.
That difference also tells you which one to reach for first in a young venture. The behaviour-based criteria need no verification machinery at all, so they are usually the cheapest differentiation to launch with.
7 · The Adtech exercise: two tapes and five kinds of buyer
Section titled “7 · The Adtech exercise: two tapes and five kinds of buyer”The class exercise makes the surplus argument concrete. Adtech GmbH is an adhesive technologies company with two innovative industrial tapes to sell. The tapes are unrelated, that is neither substitutes nor complements, the customers are professional carpenters, and each tape costs 5.00 dollars to make. A survey of 500 painters and plumbers produced five groups of exactly 100 respondents.
| Group of 100 respondents | Will pay for Power duct tape | Will pay for Star masking tape | Notes |
|---|---|---|---|
| Duct-tape only | 20.00 | nothing | No interest in the masking tape |
| Masking-tape only | nothing | 20.00 | The exact reverse preference |
| Needs both, fully | 20.00 | 20.00 | Would buy both tapes at 20 each |
| Needs both, less intensely | 17.50 | 17.50 | Needs both but to a lower extent |
| Just in case | 10.00 | 10.00 | No real interest, would buy only in case it might be needed |
The question on the slide is simply how you would set the prices. Here is my own working, since the deck leaves the arithmetic to the class. Profit per unit is the price minus the 5.00 dollar cost.
One price per tape, sold separately the uniform benchmark
At 20.00 only the three groups willing to pay 20 buy, giving 400 tapes and 6,000 dollars. At 17.50 the fourth group joins, giving 600 tapes and 7,500 dollars. At 10.00 all 800 tapes sell but only at 5.00 margin, giving 4,000 dollars. Best uniform price is 17.50 for 7,500 dollars.
Pure bundling, only the pair is for sale no separate purchase possible
Bundle willingness to pay is 20, 20, 40, 35 and 20 across the five groups. A bundle at 40 sells 100 for 3,000 dollars, at 35 sells 200 for 5,000 dollars, at 20 sells all 500 for 5,000 dollars. Best pure bundle earns 5,000 dollars, which is worse than the uniform price.
Mixed bundling, singles and a pair the differentiated answer
Single tapes at 20.00 and the pair at 35.00. The two single-preference groups buy one tape each, and both both-tape groups take the pair, since the pair beats buying two singles for them. Profit is 8,000 dollars.
| Scheme | Price or prices | Units sold | Profit |
|---|---|---|---|
| Separate, uniform at 20.00 | 20.00 per tape | 400 tapes | 6,000 |
| Separate, uniform at 17.50 | 17.50 per tape | 600 tapes | 7,500 |
| Separate, uniform at 10.00 | 10.00 per tape | 800 tapes | 4,000 |
| Pure bundle at 40.00 | 40.00 per pair | 100 pairs | 3,000 |
| Pure bundle at 35.00 | 35.00 per pair | 200 pairs | 5,000 |
| Pure bundle at 20.00 | 20.00 per pair | 500 pairs | 5,000 |
| Mixed: singles 20.00, pair 35.00 | two prices | 600 tapes | 8,000 |
Three lessons come out of that table. First, the best single price still leaves money behind: it is 7,500 against 8,000, and against a theoretical maximum of 9,500 if every group could be charged exactly its willingness to pay. Second, pure bundling on its own is worse than not bundling here, because forcing the two single-preference groups to buy a pair they do not want throws away 200 easy sales. Mixed bundling wins because it lets each type of buyer pick the offer built for them, which is the bottom row of the differentiation map in action: the customer adapts by their purchasing decision, and the adaptation is exactly what sorts them. Third, the just-in-case group is still unserved. Selling them a pair at 20.00 dollars would add 1,000 dollars of profit, but only if the two both-tape groups cannot take that cheap offer as well, which is precisely the barrier question from section 6.
8 · Free trial versus freemium
Section titled “8 · Free trial versus freemium”The last item under price differentiation is the software-style version of the same decision: give a slice of the product away in order to reach the buyers a single full price cannot.
- A clear deal that does not spoil your customers
- Conveys the full user experience and the full product value
- The trial window creates a sense of urgency, which makes actual usage more likely
- A more cumbersome sign-up and sign-off process, since payment information and cancellation are involved
- Lower download rates
- Less word of mouth, fewer recommendations, less buzz
- Very easy for the user, so there is no adoption barrier
- More users, more reviews, more recommendations, higher visibility and more user data
- Free usage highlights the value of the premium features and creates addiction
- Spoils the users
- Does not work if the conversion rate is too low, or if the addressable market is very small
- Conveys only an inferior use experience and limited product value
| Use a free trial when | Use freemium when |
|---|---|
| The market is smaller, or the application is specific; better suited to B2B | The addressable market is large and mass-market; better suited to B2C |
| Gathering information from leads matters to you | Variable costs of serving free users are low and the benefit from them is high, for example word of mouth and reviews |
| Only the entire feature set has value, so a limited free version would disappoint users | You can provide a basic value for free and still offer convincing additional value in the premium tier |
| The user invests time and effort, which immediately creates lock-in | You want the lowest possible barrier to adoption and to starting to use the product |
Both options are price differentiation with a fence built in. The free trial fences on time, which is the bottom row of the map. Freemium fences on feature set, so the buyer who needs the premium capability cannot stay in the free tier however much they would like to.
9 · Where this section stops
Section titled “9 · Where this section stops”Case corner
Section titled “Case corner”Biocon and the pricing of BIOMAb. The in-class mini case, given 15 minutes of group work.
The situation. Biocon is a small Indian biotech company that started in 1980 making enzymes for food processing. Growth in enzymes ran out, so the firm moved into biopharmaceuticals, learning clinical trials and sales through small generic molecules, and became the first insulin producer in India in 2001. In 2002 the CEO came across research in Cuba on BIOMAb, a proprietary drug for head and neck cancer, and decided to produce and distribute it in India. In 2009 phase-2 results were strong enough for accelerated approval, a rare exception granted to very promising drugs for life-threatening diseases: in combination with chemotherapy and radiotherapy the drug reached a 100 percent response rate. This was the first proprietary cancer drug ever developed by an Indian company. Production needs a new plant, and the finance estimates, based on a price of 1,000 dollars per dose, are cost of goods around 25 percent of revenues, R&D 15 percent, and marketing 25 to 30 percent, leaving the rest as profit.
The competition. Erbitux, developed by ImClone Systems in the USA and distributed by Merck, is already available in 53 countries and has been in the Indian market for colorectal cancer since 2006. It has just been approved for head and neck cancer as well, on the back of phase-3 trials, whose larger sample and longer test period oncologists generally regard as more reliable than phase-2 results. Merck can also point to three years of Indian market experience, though for a different indication. Against that, BIOMAb avoids Erbitux’s side effects such as skin rash, the phase-2 data suggest higher response rates, and BIOMAb has a definite treatment cycle of six doses while Erbitux runs an indefinite treatment plan, so the total cost of treatment is far easier to communicate.
The pricing question. Erbitux is expected at or near international levels of roughly 4,000 to 5,000 dollars per dose. Patients and doctors may expect the usual Indian discount from a local player, but the CEO has told the team not to fall into that stereotype, since the firm is an Indian company doing novel things and should carve its own niche. There is no price elasticity data. Value-based pricing is difficult in this context because 80 percent of healthcare costs in India are paid out of the patient’s own pocket and the government-sponsored public sector accounts for only 20 percent of treatments. The task: higher price than the competition or a low price approach, and name a price per dose.
| Cancer type | Incidence | Affordability | Patients who can afford treatment |
|---|---|---|---|
| Head and neck | 190,000 | 1.0 percent | 1,900 |
| Breast | 93,326 | 3.0 percent | 2,800 |
| Lung | 39,205 | 1.85 percent | 725 |
| Colorectal | 37,213 | 3.0 percent | 1,116 |
| Brain | 22,150 | 2.0 percent | 443 |
| Pancreas | 10,325 | 1.25 percent | 130 |
| Total | 392,219 | 7,114 |
Working it through with this chapter’s tools. Run the skimming and penetration checklist from section 3 against the facts, which is exactly the structure of argument the task asks for.
| Condition from the deck | Does it hold for BIOMAb? |
|---|---|
| Skimming: a genuine innovation for early adopters with high willingness to pay | Yes. A first-in-country proprietary drug with a 100 percent response rate in phase-2, sold in a market where the paying patients are by definition the affluent minority |
| Skimming: entry barriers against followers through IP or switching costs | Yes. It is a proprietary molecule with regulatory approval that took years to obtain |
| Skimming: quality is uncertain, so price signals quality | Strongly yes, and it cuts both ways. Phase-2 only data plus a low price would read as a cheap local substitute, which is precisely the stereotype the CEO forbade |
| Skimming: short product life cycles | Unclear. Pharmaceutical cycles are long, but the window before phase-3 competitors and biosimilars arrive is not |
| Penetration: an imitation aimed at price-sensitive customers | No. BIOMAb is the proprietary product, Erbitux is the incumbent |
| Penetration: network goods, winner takes it all | No |
| Penetration: significant economies of scale and learning effects | Partly. Fermentation capacity and the new plant do carry scale effects |
Six of the seven conditions point at skimming. The cost structure agrees. At 1,000 dollars per dose the cost of goods is 25 percent, that is about 250 dollars per dose in absolute terms, and that figure does not rise when the price does. R&D is already spent. So the entire difference between a 1,000 dollar price and a 2,000 dollar price falls through to contribution, while a price cut has to be paid for out of a margin that is only around 30 to 35 percent to begin with. The affordability column makes the same point from the demand side: only 1,900 head and neck patients in the whole country can afford treatment at all, so the low-price strategy is not buying you a mass market, it is discounting to a small group that would mostly have paid anyway. Note also the sensitivity to watch: those affordability rates are themselves a function of price, and with no elasticity data available the size of the paying pool is the single biggest unknown in the case.
My recommendation. Skim, but skim with differentiation rather than with one proud number.
The reasoning in short. A price near Erbitux would be indefensible on phase-2 data against an incumbent with phase-3 evidence and three years of local experience. A price at or below 1,000 dollars would confirm the cheap-local-copy reading of the product, waste the superior response rate and the absence of skin rash, and give away contribution that the small paying population cannot make up in volume. Roughly half of Erbitux prices the difference in evidence honestly while still reading as a serious drug. The tiering matters as much as the level: the public sector is 20 percent of treatments and is a different sub-market with a different payer, so serving it at a lower price costs nothing at the top end provided the fence holds - separate channel, tender-based supply and documented eligibility, so that a private oncology clinic cannot simply buy at the assisted price. Without that fence the two-tier structure degrades into a single low price, which is section 6’s warning applied to a life-and-death product.
The transferable lesson. Where willingness to pay is extremely unequal, as it is when 80 percent of healthcare is paid out of pocket, a single price is at its worst. Skimming plus a fenced lower tier lets the same drug be premium and accessible at once, which no single number can be.
Worked example
Section titled “Worked example”A small numerical demonstration that two prices beat one. A venture sells a design tool. Unit cost to serve one customer is 20 euros. There are two segments.
Profit = (price minus unit cost) × number of buyers who accept that priceSegment P, professionals 300 customers, willing to pay up to 120 euros
Segment S, students 700 customers, willing to pay up to 40 euros
With one uniform price you have two sensible candidates.
| Single price | Who buys | Buyers | Margin per buyer | Total profit |
|---|---|---|---|---|
| 120 euros | Professionals only | 300 | 100 | 30,000 euros |
| 40 euros | Everybody | 1,000 | 20 | 20,000 euros |
The best uniform price is 120 euros and earns 30,000 euros. Charging 40 euros to reach the students costs more in surrendered professional margin than the students bring in, which is the classic squeeze a single price puts you in.
Now differentiate, charging each segment its own price.
| Scheme | Professionals | Students | Total profit | Versus best uniform |
|---|---|---|---|---|
| One uniform price of 120 euros | 300 × 100 = 30,000 | 0 | 30,000 | - |
| One uniform price of 40 euros | 300 × 20 = 6,000 | 700 × 20 = 14,000 | 20,000 | minus 10,000 |
| Two prices, 120 and 40 euros | 300 × 100 = 30,000 | 700 × 20 = 14,000 | 44,000 | plus 14,000, that is 46.7 percent |
The extra 14,000 euros is surplus that the single price simply threw away: 700 customers who valued the product at 40 euros and were priced out, each contributing a real 20 euro margin.
The fence that makes it workable. The student price sits in the top row of the differentiation map, a defined group of customers, so it cannot be self-enforcing and has to be verified. The scheme needs an education licence granted only against a current institutional email address, non-transferable, tied to a named individual, expiring at the end of each academic year, and ideally feature-limited so that commercial use is inconvenient as well as prohibited. Without that check, professionals register as students, everyone pays 40 euros, and profit falls to 20,000 euros, which is 10,000 euros below the plain uniform price. That is the sharpest way to state section 6: a differentiation scheme with a broken fence is worse than no differentiation at all.
Apply it to your project
Section titled “Apply it to your project”-
Sketch the willingness-to-pay spread for your own market. Do not look for one number. Name at least two groups you believe would pay clearly different amounts, and say roughly how many of each there are. If you cannot see a spread, you do not need this chapter yet.
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Choose your entry point on the time axis first. Run the deck’s checklist honestly. Genuine innovation, high willingness to pay among early adopters, IP or switching-cost barriers, quality uncertainty in the category: that is skimming. Imitation, price-sensitive buyers, network effects, strong scale and learning effects: that is penetration. Most hardware and deep-tech ventures find themselves on the skimming side and price as if they were on the other one.
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Write down the price path, not just the price. If you skim, say now at which point and on which trigger the price comes down, since the room to lower it later is one of the advantages you are paying for. If you penetrate, say what has to be true about the installed base before the price may rise.
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Pick your differentiation criteria from the seven on the map. Customer value and A B C classification, customer groups, individual accounts, region, quantity, time and demand level, channel. Two or three is plenty at the start.
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For each criterion, answer the deck’s question out loud: can the customer adapt by their purchasing decision? If they can and you did not intend it, you have a leak, not a strategy.
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Design the barrier before you publish the second price. Verification for identity-based and regional prices, and a genuine behavioural cost for quantity, time and channel prices. Then test it the hard way: work out exactly how your most sophisticated high-paying customer would obtain the low price, and see whether you could actually stop them.
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Run the arithmetic like the worked example above. Compute profit under the best single price, then under your differentiated structure, then under the disaster case where the fence fails completely and everybody pays the lowest price. If that third number is unbearable, tighten the fence or drop the tier.
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If you are software, decide free trial versus freemium on the deck’s criteria, not on fashion. Smaller specialised B2B market, lead information matters, only the whole feature set has value, and time-and-effort lock-in point to a trial. Large B2C market, near-zero cost to serve free users, and a basic version that is genuinely useful point to freemium.
Key terms
Section titled “Key terms”| Term | What it means in plain words |
|---|---|
| Dynamic pricing | Deliberately changing the price of the same product over time, mostly along the product life cycle |
| Price differentiation | Charging different buyers different prices for essentially the same product at the same time |
| Skimming pricing | Enter at the highest possible price, take fewer sales at a higher margin, then walk the price down as competition arrives |
| Penetration pricing | Enter below comparable products to win share and grow fast, then possibly raise the price once the installed base is large |
| Willingness to pay | The most a particular buyer would hand over rather than go without; it differs across buyers, which is the whole reason differentiation exists |
| Carry-over effect | Higher sales today produce higher sales tomorrow, so today’s price is partly an investment in future demand |
| Price elasticity | How strongly sales volume responds to a price change; it increases as a market’s life cycle progresses |
| Experience curve | Unit costs fall as cumulated production volume grows, which rewards selling more earlier |
| Static-optimal price | The price that maximises profit in the current period considered on its own |
| Dynamic-optimal price | The price that maximises profit across the whole life cycle, which comes out lower because it also buys future volume and lower future costs |
| Customer can or cannot adapt | The deck’s dividing line: whether a buyer is able to move themselves into the cheaper price by changing their purchasing decision |
| Yield management | Time and demand-level pricing where the price tracks the calendar and remaining capacity, as with flight tickets and hotel rooms |
| A, B, C customers | Classifying accounts by their value to you, in revenue growth and loyalty terms, and pricing accordingly |
| Mixed bundling | Offering the items both separately and as a discounted package, so each type of buyer self-selects the offer meant for them |
| Free trial | The complete product given away for a limited period, fenced by time |
| Freemium | A permanently free but limited version, fenced by feature set, with the paid tier carrying the valuable capability |
Test yourself
Section titled “Test yourself”- Name the three families of dynamic determinant from the Simon framing, and list the individual determinants inside each.
- Give three advantages of skimming and three of penetration, and then state two conditions under which each strategy is the right choice.
- Why are dynamic-optimal prices not equal to static-optimal prices? Name the four effects and say which direction they push today’s price.
- Reproduce the seven criteria for price differentiation and sort them into the two rows of the deck’s map. What exactly does the axis separating the rows mean?
- A venture has unit cost 30 euros. Segment A has 400 customers willing to pay 90 euros, segment B has 600 customers willing to pay 50 euros. Compute the profit under the best single price and under two segment prices, and state the gain. Then name a fence that would make the two-price scheme hold.
- In the Adtech exercise, why does pure bundling perform worse than simply pricing the two tapes separately, and what makes mixed bundling the better answer?
Revision summary
Section titled “Revision summary”Next: Value-Based Pricing → - pricing from what the customer gains, not what it cost you.