Price discrimination strategies for profit maximization

Price Discrimination and Related Concepts

In this paper, we will discuss some basic concepts regarding price discrimination and its related topics. We will first choose a product and outline its market structure, then by using a technique as described in the article written by Michael E. Porter we will discuss how the price of our chosen product should be decided so that profits are maximized. Finally, we will discuss how the pricing technique would affect the profit, supply and demand of each segment of our market. For the reader to have a more general and easy idea regarding these mentioned concepts, we have chosen Pepsi as our main product.

Market structure

Pepsi is a global brand which originated in the United States more than a century ago. It is a carbonated water drink and it also owns many different subsidiaries alongside its main product such as mineral water and other cold drinks. When having a close look at its market structure, we see that it has many important rivals in the business but most notably it faces competition from the firm Coca Cola which is also known as Coke.

Both of these firms have been logged into intense battle for supremacy over each other since many decades and therefore if we assess the market structure of Pepsi then it is seen to have a sort of duopoly since both Pepsi and Coke nearly dominate the market of cold drinks. Pepsi have even been known to use barriers to block the entry of newer firms which may have proved to be great competitors later on in their lifetime. Pepsi can also be classified as being under monopolistic competition where the overall industry is competitive but the other corporations are able to create some sort of influence in the market through product differentiation and brand recognition.

Product pricing

There are many different techniques which Pepsi can use in determining its product's price so that it can generate healthy profits, here are few of those in detail. Since Pepsi exists in a duopoly situation where it faces huge competition from its close rival Coke, it should adapt a price which is relatively similar to its rival in the market. It is often seen that two competitive products being offered by any firm tends to have much similar characteristics as to other products of same category.

Therefore it is extremely important for Pepsi to keep a close eye on the prices offered by its competitors and offer its product on a similar price. In many cases when a firm launches a new product then it tends to keep its price lower as compared to its competitors so that the customers choose their product as compared to their competitors, in any such scenario Pepsi should not try to lower its price since it might affect its profit levels as well as its competition with its major rivals.

Therefore in any such circumstances Pepsi should focus on other different factors such as proper advertising techniques to promote its product rather than lowering its overall price. This can greatly benefit Pepsi since the common consumer would always be more aware of the qualities and presence of Pepsi rather than any new product being offered in the market. There are many factors which Pepsi can use in order to boost its image such as health related factors, celebrity endorsement and so on.

Other techniques which Pepsi can utilize in order to maximize its profits includes offering special discounts on the purchase of its product. Here it is often seen that during any festive event many firms tend to lower their prices so that much of their product is sold in the market. Pepsi can utilize any such public event to boost its overall sales, it could offer discounts of ten percent or twenty percent in its prices for a limited period of time. This tactic can greatly increase the sale of the product and can even attract new buyers of the product which were previously not interested in the product. "Celebrity endorsement greatly boosts the sales of any product if utilized properly." (Furtwengler, 2010).

Other important point to note here is regarding the contents to sale ratio, it is very important for Pepsi to keep up a balanced ratio regarding its profit levels as compared to the overall cost of buying all the ingredients for the product as well as for the product's manufacture. "Profit margins are highly dependent on the supply factor" (Reitlinger, 1961).

Let's say that it requires five dollars for Pepsi to make ten liters of drink which it then sells for ten dollars, therefore its overall profit ratio would be two to one. It is this ratio which is extremely important for Pepsi to note and to maintain in order to attain better profit margins and any pricing technique introduced must kept in mind this profit margin.

Affect of pricing technique

Keeping up a proper pricing technique is very important when maintaining a proper supply, demand and profit levels of any product. Let's view how pricing affects each of these areas in some detail.

"The supply portion deals with all of the goods bought by the firm in order to make its end product" (Tye, 1990), the prices which are relative to the bought goods are closely related to the end prices since if these goods are bought up at a nominal sum then it is easy to sell the product at a nominal sum as well, whereas if the goods are bought at an expensive rate then it is very difficult to sell the end product at a nominal rate.

It is therefore recommended for the firms to carefully choose better supply partners in terms of both quality and rate since it would have a huge impact on their pricing of the end product.

Looking at the demand, then we see that it is more flexible and in the firm's control than the supply factor. The firm can change demand based on various different other factors such as proper advertising techniques, better quality product, better reviews and so on. In terms of pricing, this greatly determines as to how much the product would be sold and what type of consumers would buy it.