Customers usually complain that they purchased the same product or service at higher price than their friends did. This is actually the price targeting technique that sellers use in order to receive maximum profits or revenue. However, if the customers are aware of the actual price and sellers' technique then they can make a better deal.
Price targeting is one of favourite techniques of vendors to earn more profits since they can sell the same product or service at different prices to different customers. By this method, vendors identify point of transaction where consumer decides to purchase the product or service and is ready to pay amount close to the maximum price. Thus, the vendors may capture the consumer surplus.
Retailers make discrimination in prices because consumers also hide the maximum price that they are willing to pay off for the particular product or service. Therefore, retailers also do their best to bring customers at the level of maximum price they are willing to pay.
Price Targeting in Industry
Price targeting can be separated into degrees as first, second and third degree. Different pricing methods are being used for each degree. Companies segment the market and identify consumers' elasticity of demand and then set the price accordingly.
First degree price targeting is applied over individual consumers. They are charged differently for the identical goods. But this technique doesn't work every time since retailer cannot always identify the consumer's purchasing power or willingness to pay for the product or service. However, when the retailer does, he/she earns enough profit.
Second degree price targeting is applied when clients order in bulk. This kind of price targeting often applied in stores like reduced prices are offered to the clients if they purchase 2 shirts instead of only one. This generates more revenue for the company.
Third degree price targeting is based on segmenting the market. The segments are defined in a way that generates more profit for the company. For example students do not have enough money to spend on expensive products or services. Therefore, most of the companies segments a separate group for students and offer them reduced prices to meet their purchasing power. For example students are offered lower prices in theatres, transportation, restaurants and stores. Third degree price targeting is also applied during special occasions or seasons and offered discounted prices so as to increase the revenue. (wiseGEEK)
Majority organizations like Universities, Airlines, Coffee Shops and Pharmaceuticals now use price targeting method as according to the structure. For example, in-state students and out of state students have no difference in their education standards. They study the same books, share same resources i.e. teachers and labs but there is great difference in their fees. The out of state students pay three times more than the in state students. Similarly, the sellers charge different prices at coffee shops. Even if there is not much difference in cost or flavour of the coffee, still the price discrimination is high. The same coffee charges vary at different flight schedules because it gives a chance to the sellers to earn more.
Pharmaceutical companies also apply this pricing strategy to make more revenue. These companies set the price of medicines as according to the purchasing power of the customers. In developed or wealthy companies, normally the insurance companies pay for the medicines on behalf of an individual since the employer hire these companies for the welfare of employees. Therefore the pharmaceutical companies charge very high from insurance companies. However, in case of poor or underdeveloped countries, pharmaceutical companies charge lower so that the people can afford to purchase drugs.
The large companies like Apple and Dell also uses the same strategy. These companies have created categories over their website. When the customers visit website, they are asked to choose their country. By inquiring this, the company actually discriminate the customers and so charge different prices based on the region. These companies also classify the customers and charge different prices. Products and services are offered at different rate to students, professionals, small medium businesses and large organizations. (history-society, 2009)
Price Targeting Conditions
Before the retailers or companies set different prices for the customers, they first divide customers into groups based on the difference in price elasticity of demand. The company charges more to the group that has low price elasticity of demand and less to the group that has higher price elasticity. By this strategy, the company can boost its profits or revenue.
However, the group with high price elasticity of demand may resell the product to the group who has low price elasticity of demand. Therefore, the companies must consider the suitable pricing strategy that prevent consumers switching or market seepage.
Pharmaceutical Companies Price Targeting
Pharmaceutical companies, stakeholders and other global health donors have already recognized need for the careful consideration of factors that restrain the usage of price targeting or discrimination as a mechanism to increase access to drugs in poor and developing countries without affecting their profits. Since, price targeting in the market of drugs can help people living in low and middle income countries. Setting the price of drugs as according to purchasing power of consumers can effectively improve the health conditions all over the world. Pharmaceutical companies were reluctant of changing their pricing models because of the fear of losing their profits in middle and high income markets. However, the emerging markets and the growing competition among the pharmaceutical companies has changed thoughts on pricing strategies and majority now follows the price discrimination mechanisms.
In case of Pharmaceutical companies, usually the third degree of price targeting is applied. Consumers are segmented as according to geography and socio-economic conditions. In western countries, the insurance companies pay for the patient to the pharmaceutical companies or the western citizens have low price elasticity of demand. They can pay the maximum price for the drugs. Therefore, the pharmaceutical companies also set the higher prices whereas in case of Asian countries like India, Pakistan and other underdeveloped countries, there are poor conditions of health. People cannot afford high prices of drugs. So, the lower prices in poor countries may increase the company profits as well as increase access of drugs for the citizens. However, there are many other factors that companies have to consider like competition, purchasing power of buyer, distribution channels and price controls.
Pharmaceutical companies need to look upon different aspects along with profit maximization so as to maintain their positioning in the market. The pharmaceutical company has to prove itself as socially responsible organization that not aims to make profits but also cares about the societal obligations and responsibilities. Price targeting or discrimination provides an opportunity to pharmaceutical companies to prove itself as socially responsible and consistent. Low prices in developing countries and setting prices as according to the income level increase the access to medicines. Pharmaceutical companies are implementing the same pricing strategy for the welfare of society. (Avert)
If pharmaceutical companies apply suitable pricing strategies then it can lead to increased sales, profits and society welfare. Much research has already been done on the positive impact of pharmaceutical companies' price targeting on societal welfare.
It is a better strategy for the pharmaceutical companies to increase their profits, if they open markets in countries where there is low affordability than the prevailing price in present markets. In this way the price targeting will increase consumer as well as producer surplus.
In addition to the consideration of low and high income countries, it is also important for the company to consider the economic, social and political conditions in the country. For example, some low and middle income countries use price ceilings on drugs like South Africa. Moreover, the intellectual property regulations are also different in counties; therefore company has to plan accordingly. Pharmaceutical companies also offer donation programs in low and middle income countries so as to receive tax benefits.
The generic producers in Asian countries have already captured high shares in the market so it has become difficult for patented pharmaceutical companies to position themselves in the market. Since, these generic drugs are supplied at lower prices so the pharmaceutical companies needs to lower the prices as well to compete with generic producers. Price targeting strategies can help pharmaceutical companies to maintain their competitiveness in distribution and production costs and compete with the generic manufacturers. Patients will definitely prefer to purchase patented drugs instead of generic medicines if retailed at the same price. GSK, the patented drug company has recently reduced the prices of its medicines low developing countries for the purpose of public health advantage. The prices are set as according the income level, market share of health system and structure of health system.
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