Large Difference In Price For A Small Difference in Performance

Smart pricing lets customers that place a high value on a product spend more - if a customer wants to spend more good pricing lets them do just that.

Large Difference In Price For A Small Difference in Performance

One popular approach is to offer a premium or "pro" version of a product, along with a large increase in price for a relatively small increase in performance.

Take a look at the price on this package of 8 rechargeable batteries. We'll ignore the discounted price for now and focus on the list price (although it is interesting to note how here, when the batteries are on sale, the list price is used as an anchor).

The batteries promise a minimum of 1900mAh and cost $26.99.




Here is the premium "pro" version of the battery. These promise slightly higher capacity, a minimum of 2450mAh, and cost $46.99.




It is a relatively modest improvement in performance – the premium version of the battery offers about 29% more capacity. The price however is very different – the premium version costs almost 75% more.

This is a kind of differential pricing – selling the same, or at least very similar, product at different prices depending on how people value it. The price-sensitive shopper, or the person who just wants the cheapest possible batteries and really isn't concerned about performance, can buy the standard version.

A shopper that is less sensitive to price, and/or more interested in the fine print and better performance, can buy the premium "pro" version at a much higher price, with a much higher markup, generating much more profit for the vendor.

How can we assume a bigger markup on the pro version? Take a look at the batteries from a competitor, one that is more focussed on the price-sensitive consumer that is less focussed on brand names.

Here the 1900mAh version costs $18.99...




...and the premium "high capacity" 2400mAh costs just $4.00 more.




Contrast that with the $20 premium (a difference of 500%) charged by the name brand for a similar increase in performance. It strongly suggests that those extra mAh don't cost all that much to provide, and that the name brand vendor is placing a much higher markup on their premium version.

If the customer values mAh and is prepared to pay more for better performance the vendor is only too happy to oblige.

Product Differentiation Value-Based Pricing