ABSTRACT
Compared to employing a strict single price strategy, financial services institutions can significantly increase profits by using smart forms of price differentiation. As an example, let us assume that there are three segments in a given market that are willing to pay different annual fees for a credit card. All segments are equally large and comprise 10,000 customers. Segment A is willing to pay $40 whereas segment B is willing to pay up to $60, and segment C is willing to pay $80. The cost to the financial services institution to issue the credit card is $20. The resulting price-response function is displayed in Figure 5.1. If the institution sets the price at $80, then only segment C will buy, which means 10,000 cards will be issued; if the price is $60, then 20,000 cards will be issued since both segment C and B will buy. At a price of $40, segment A will also buy and the maximum volume of 30,000 cards will be reached. Any further decrease in price would not generate additional sales.
