Dual Pricing Definition
Dual Pricing is a transfer-pricing approach that separates customers based on their ability to pay. It uses two separate transfer pricing methods to price each inter-division transaction. The dual pricing strategy is used to create a range of products that have different prices based on the target market. This allows companies to offer products at every price point so they can appeal to as many consumers as possible.
Importance of Dual Price System
The dual price system works by charging higher prices to those customers with greater income or purchasing power, while simultaneously charging lower prices to less wealthy customers who are willing to pay the lower prices for products. The dual pricing strategy ensures that each group of customers sees value in what they purchase and that each customer is happy to buy the dual-priced product.
Two Systems of Dual Price
The two types of Dual Price Systems are differentiated pricing and discriminatory pricing. With differentiated pricing, the dual-priced product has different features for each group of customers, while with discriminatory dual pricing, there is only one product, but has dual prices.
This type of dual-price system charges different prices based on how similar or substitutable the products and services are. For example, a generic version of a product and the original branded version would both be priced at a lower rate than the dual-priced original branded and luxury dual-priced versions. This makes sense as the consumer is more likely to buy the cheaper product because it has the same use for them.
This type of dual-price system charges each customer the maximum they are willing to pay for a product. This ensures that each consumer buys at their preferred price. This system gives goods at lower prices to consumers with less money and goods at higher prices to those with more money. For example, if a consumer has $80 and is looking to buy a new phone, he or she will be given the dual-priced entry-level phone. This is because it’s the cheapest version of phones for this customer. However, if they wanted to enter a more high-end market and purchase the dual-priced luxury version of the iPhone 13, they would be in a different dual-price system. This dual price system ensures that consumers have to pay more for what they want and not just because of who they are. This helps increase profits massively if the consumer is willing to buy this luxury version of a product or service.
How to Set Up Dual Price System in Your Business
Step 1: Research Consumer Purchasing Power
Consumer’s purchasing power is the number of goods and services that they can buy with their money. The higher the consumer’s purchasing power, the more expensive products they are willing to pay for. Use sources such as Dun & Bradstreet’s Million Dollar Directory to estimate the percentage of potential customers in varying income brackets.
Step 2: Decide on Products’ Worth
A dual pricing system is only effective if each product has value in the eyes of its target market. Determine your company’s break-even point by figuring out how much it costs to produce one unit, including labor and overhead, and then divide that figure by the price per unit you want to set.
Step 3: Identify Your Target Market
Determine which customers you want to sell your dual-priced product to and target them with advertising and promotion strategies. Send samples of dual-priced goods or services to potential customers before offering them for sale so that they will be familiar with it when the dual-priced product is completed.
Step 4: Price Your Product for High-Income Market
Price your dual-priced product using a discriminatory pricing strategy, in which you sell the highest quality item at a price that can earn a profit. Set this price high enough so that only customers in an income bracket that is higher than your target market can afford it.
Step 5: Price Your Product for Lower-Income Market
Price dual-priced products using a different pricing strategy, such as “price penetration.” In this type of dual pricing system, set the price low enough so that it will generate immediate sales and profits, while simultaneously generating interest in more expensive dual-priced goods.
Step 6: Introduce the Lowest-Priced Product
Introduce dual-priced products or services to your target market by selling them at a price that is lower than your highest-priced product. Keep track of sales figures and compare them to the sales of higher-priced dual-priced products so that you can determine which dual-priced product customers are most interested in.
Step 7: Build upon Success or Eliminate Lowly Products
If your dual-priced products perform equally well, you can expand on your dual pricing strategy by expanding the dual price system to include additional products. If not, discontinue low-performing dual-priced goods or services and sell them under a different dual-price system.
The Benefits of Having a Dual Pricing Strategy
The dual-pricing system offers a wide range of benefits that help it to be successful. 1. First of all, dual prices can help businesses generate more revenue than if they only offered the same product at one price.
Because dual-priced goods offer customers with high incomes an opportunity to purchase higher quality products or services, dual pricing helps companies appeal to a larger market.
2. Secondly, dual prices can help businesses control the number of units they sell by discouraging customers with lower incomes from buying dual-priced products. 3. Some companies may find that offering dual-priced goods or services causes resentment among customers. This dual pricing strategy may bring the business into disrepute or lead to boycotts, which can hurt sales and cause profits to low-income consumers to avoid their business altogether, especially if it is an expensive item or service. However, having dual prices can also help businesses stay in business by continuing to offer their dual-priced items and services even when they experience a drop in demand for them. 4. It may take your business some time to figure out which dual price system works best for you, but it will be worth the effort once you achieve success with dual pricing.
Dual Pricing is a dual (or two-tiered) pricing system in which a business charges different prices for the same product or service to customers who have differing levels of disposable income. Setting up a dual-price system will require you to identify your target market and set prices accordingly. The dual price system is beneficial for businesses that want to appeal to consumers with a wide range of incomes by selling dual-priced products that have higher prices to people with higher incomes. The dual-price system will require some testing and research to determine which dual-price system works best for your target market. If you find one not working after a trial period, try a different dual-price strategy until you find one that works for your business.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.