19. More for less – how to use a nonlinear pricing structure?

Imagine that after a full day of trekking in the mountains, you arrive at a shelter. The first beer you drink will have the greatest value to you, and each subsequent one — less. You would gladly pay 15 PLN for the first beer rather than for the next. With each additional beer, you will be willing to pay less. So what is the most optimal pricing structure that will make the customer buy the most?

According to Hermann Simon, it is worth using a nonlinear pricing structure in which each subsequent product has a different price¹. For example:

- First: 15 PLN
- Second: 12 PLN
- Third: 9 PLN
- Fourth: 7.5 PLN
- Fifth and each subsequent: 6 PLN

Such a structure, where each subsequent product has a different price, is called “nonlinear.” Thanks to it, there is a much greater likelihood that the customer will buy 5 beers, spending 49.50 PLN, which is almost 10 PLN on average per mug. With a unit variable cost of 1.50 PLN per beer, the margin will be 42 PLN.

It might seem that this unnecessarily complicates the situation and that you could just set the price of each beer at 10 PLN. Unfortunately, because the customer’s willingness to pay decreases with each subsequent mug, with a fixed price they would probably stop at the second one. Knowing that before the first beer the customer’s willingness to pay is the highest, you can maximize profits by setting a higher-than-standard price.

On the other hand, we know that with each subsequent mug, the amount they are willing to pay decreases. For this reason, setting a high linear price quickly eliminates the possibility of selling additional beers. However, if we adjust the margin on subsequent products to the customer’s willingness to pay, we can continue selling and achieve additional profits that we would lose with linear pricing.

When using a nonlinear pricing structure, it is necessary to be aware of certain risks. You need to ensure that customers who can already purchase at the lowest prices are not buying for others. You should also monitor whether such a structure is well received. Excessive use of the customer’s willingness to pay can make them dissatisfied. You must set an optimal margin level that leverages their willingness to pay without discouraging them from buying.

This example shows that in selected cases, nonlinear pricing can significantly increase profits. However, an important element is having knowledge of the customer’s willingness to pay and their standard purchase volume. It is worth remembering that this strategy can easily drive customers away, so it is necessary to set the optimal price level to encourage purchases while maximizing profits.

[1] Simon, 2015, Pricing Man