Differential Rate


A differential rate is a rate applied to a structure which is deviant from the prevailing standard rate structure. A differential rate can be applied at different scenarios. A differential rate can be more than the prevailing rates or it can be less than the prevailing rates. Depending on the scenarios the rates which are more or less than the standard structure would be decided.

Let us consider wages of laborers working in a factory. The amount of workers required in the factory under normal conditions is 100 at Rs.100 per day. Now the factory receives an order of making more products than the existing orders. For this the companies would require more labors immediately as the product needs to be delivered in time. Therefore, to attract more labors the company may indulge in offering differential rates to the labors i.e. it may end up offering more to the extra labors than the existing labors. Similarly, there can be a case where there is a demand from labors to get a job in the factory. In this case the factory may not need the labors and hence, end up offering wages which are lower than that of the existing wages. This difference in the wage rates is known as differential rates.

The above case may be applicable for many things like raw materials, land, rent etc. The differential rates are largely determined by the demand, supply, urgency, and time value of the products. A differential rate for a particular employee or resource can be determined by the criticality of the resource (for e.g. a pay of the CEO). A discount given to a consumer can be considered to a certain extent as differential rate.

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