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What is Nonlinear Pricing?
Nonlinear pricing is a pricing strategy in which the price per unit varies depending on the quantity purchased or consumed. Instead of charging a constant price for each unit, businesses use tiered, bundled, or usage-based structures to optimize revenue, influence consumer behavior, and segment customers based on willingness to pay.
Definition
Nonlinear pricing is a pricing method where the price per unit of a good or service changes with the quantity purchased, often through tiers, bundles, or discounts.
Key takeaways
- Price varies by quantity: Larger purchases may cost less per unit.
- Enables price discrimination: Captures different willingness to pay across customers.
- Common in utilities and telecom: Electricity, water, and phone plans.
- Used in retail and SaaS: Volume discounts, subscription tiers.
- Increases revenue efficiency: Encourages more spending and reduces churn.
How nonlinear pricing works
Prices change based on consumption or purchase levels. Businesses design pricing curves to achieve specific behavior:
- Encourage bulk purchases
- Prevent overuse (utilities)
- Differentiate customers by usage needs
- Increase total revenue
Common forms of nonlinear pricing
1. Tiered pricing (block pricing)
Different price ranges for different usage levels.
Example: Electricity cost increases after a certain consumption threshold.
2. Quantity discounts
Unit price decreases with higher quantity.
Example: “Buy 2, get 20% off.”
3. Bundling
Products sold together at a lower combined price.
Example: Cable TV + Internet + Phone package.
4. Two-part tariffs
A fixed fee + variable usage fee.
Example: Mobile phone subscription with base fee + data usage.
5. Freemium and SaaS tiers
Different features offered at different price levels.
Why businesses use nonlinear pricing
Revenue optimization
Captures more consumer surplus by charging different rates to different customers.
Market segmentation
Separates low-usage and high-usage customers.
Behavioral influence
Encourages desired consumption patterns (e.g., bulk buying, contract commitments).
Competitive advantage
Creates flexible pricing that can attract diverse customers.
Industries that use nonlinear pricing
- Utilities (electricity, water, gas)
- Telecommunications
- E-commerce and retail
- Software-as-a-Service (SaaS)
- Transportation (airline pricing)
- Financial services
- Hospitality (seasonal and dynamic pricing)
Benefits
- Increases revenue
- Improves customer targeting
- Encourages upselling and loyalty
- Reduces waste or overconsumption (in utilities)
Challenges
- Complexity for customers
- Risk of perceived unfairness
- Harder to implement and manage
- Requires strong data and analytics
Nonlinear pricing in economics
In microeconomic theory, nonlinear pricing is often used by monopolists or firms with market power to extract consumer surplus. The pricing function is designed to maximize profits subject to incentive compatibility and participation constraints.
Related concepts
- Price discrimination
- Dynamic pricing
- Tariff structures
- Bundling strategies
- Consumer surplus
Sources
- OECD – Pricing Strategies and Market Dynamics: https://www.oecd.org/
- MIT OpenCourseWare – Microeconomics: https://ocw.mit.edu/
- Harvard Business Review – Pricing Strategy Insights: https://hbr.org/
Frequently Asked Questions (FAQ)
1. Is nonlinear pricing always cheaper for customers?
Not always. It depends on usage patterns and pricing design.
2. Why is nonlinear pricing common in utilities?
To manage consumption and recover fixed infrastructure costs.
3. Is nonlinear pricing the same as dynamic pricing?
No. Dynamic pricing changes over time; nonlinear pricing varies by quantity.
4. Does nonlinear pricing work in competitive markets?
Yes. It is widely used in telecom, SaaS, and retail.
5. Can nonlinear pricing be unfair?
If poorly designed, customers may feel they are being penalized or confused.
