Dynamic Pricing Strategies for Maximizing Customer Satisfaction

By Friedman, Hershey H.; Lewis, Barbara Jo | The National Public Accountant, January-February 1999 | Go to article overview

Dynamic Pricing Strategies for Maximizing Customer Satisfaction


Friedman, Hershey H., Lewis, Barbara Jo, The National Public Accountant


Accountants are often asked for advice on pricing products, and their input is often quite helpful and necessary. Accountants, however, are very likely to focus on costs when trying to advise management on appropriate pricing strategies.

Economists might focus on rules for maximizing short-run profits, i.e., set marginal revenue equal to marginal cost. This is because economists are more interested in studying the demand-curve for a product than in focusing on the actual costs; they are concerned with using demand (marginal revenue is derived from the demand curve) to determine the optimum price. Marketing executives, on the other hand, are more likely to focus on the different consumer segments since marketers are attuned to the idea of market segmentation. Market segmentation involves dividing the market into distinct groups of customers, each with their own needs, and considering each as a possible target market. The firm will then decide which segments to target and will provide the selected target markets with different products and/or different marketing mixes. Each of these approaches are valuable in pricing.

The purpose of this paper is to introduce accountants to ideas from marketing and economics that can be quite helpful in determining the ideal price to charge for a product or service.

Segmented (Tiered) Pricing

A one-price policy might be easy to administer but it is not necessarily the best way to maximize profits or best satisfy one's customers. A company that uses segmented pricing will charge two or more prices even when costs are the same for each of the market segments.

With certain products and services, a firm might note that not all customers have the same sensitivity towards price. Some market segments might be willing to pay more for the same goods or services. For example, business travelers are willing to pay more for an airline ticket than vacationers. Airlines take advantage of this difference in price sensitivity (what economists refer to as price elasticity of demand) and may charge much more for a ticket if one wishes to leave and return during the week than if one plans to stay over a weekend. The reason is that airlines assume that people who travel in the middle of the week are very likely to be business travelers and therefore less sensitive to price than individuals who are vacationing or visiting friends and relatives. In general, customers who have more substitutes available to them, or who do not have as great a need for the product, will be more sensitive (i.e., elastic) to price; customers with fewer substitutes and/or a greater need for the product will be less sensitive to price (i.e., inelastic) and be willing to pay more.

The same idea could be used with regard to speed of service. Some customers might be willing to pay more for faster service than others. If this is the case, a company might wish to consider different prices for different market segments. Some photo-developing firms find that they can increase their profits by providing two levels of service: fast service, e.g., one-hour film developing, at a high price; and normal service at a lower price. A one-price system does not result in maximum profits for such businesses.

Similarly, a business or organization that notices that its waiting lines are unusually long should consider adding a special line with faster service. For instance, suppose a college has an inefficient registration system and it takes students an average of 4 hours to register for their courses. If the typical working student earns $8 per hour, he or she is losing $32 by waiting on a line. It would certainly be in the students' interest if the college were to open up a special priority service line with minimal waiting at a cost of, say, $20. The students opting for this line will save $12 and not have to experience the aggravation of waiting on a long queue. Even students selecting the free line will find that their wait has been reduced since a number of students will choose the premium line and there will be fewer students on the free line. …

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