The Advantage Of Price Segmentation

Price segmentation (offering different prices to different market segments) increases overall revenues and profits, and it is particularly beneficial to industries that have high fixed cost structures. Obviously, price segmentation works better to the extent to which there are real customer need segments and to which you can effectively isolate those segments.

As an example, imagine that your business only offers one product priced at $5. But some consumers are willing to pay up to $8. You are leaving $3 on the table for each of them. Other consumers are more price-sensitive and only willing to pay $3.  You do not get any of their business. With price segmentation more revenue is generated by offering three prices — $3, $5 and $8 – instead of just one — $5.

Prices can be segmented in the following ways:

•    By time (higher hotel room rates for holidays and other peak tourist seasons)
•    By location (higher prices in locations with less competition or in which less price-sensitive shoppers shop, orchestra versus balcony seats in a theater)
•    By volume (volume discounts for large orders)
•    By product attribute (first class vs. coach section on airplanes; solid brass vs. plastic faucets)
•    By product bundling – examples:

o    selling software in product suites vs. by the program
o    selling e-Learning by library vs. the individual course
o    fixed price versus a la cart menus
o    “fully-loaded” models versus “basic” models with additional options available
o    single admission ticket at theme parks versus charging per ride
•    By customer segment (brand-loyal vs. price-sensitive vs. convenience-oriented or image-conscious vs. economy-oriented)
Other price/value considerations
•    Pricing strategy should consider these factors: (1) perceived customer value, (2) competitive response, (3) channels of distribution, (4) cost parameters and (5) congruence with the brand position
•    Constantly explore new ways to uniquely add customer value to your products and services
•    In creating greater customer value, always ask, “How can we make it quicker, easier, less risky, or more pleasant to do business with us?”  Ask, “What could we do that would favorably surprise and delight our customers?”
•    Communicate the value of services that you provide for free
•    Providing value-added products and services at “no charge” is superior to price discounting as a short-term purchase incentive because it preserves the value of the brand
•    Be careful to price your products and services to reward brand-loyal (versus brand-switching) behavior

Pricing is becoming an increasingly sophisticated discipline. These three topics (reference prices, price sensitivity, and price segmentation) are just a few of the important considerations when developing pricing strategies and tactics.  (Introductory pricing [skimming versus penetration, trial pricing], product mix pricing, fixed and variable price components, price adjustments [reason, amount, and frequency], pricing to meet buying system requirements, loss-leader pricing, prestige pricing and even-odd pricing are other pricing approaches/considerations of note.)  I would highly recommend reading The Strategy and Tactics of Pricing by , Thomas T. Nagle and Reed K. Holden to better understand how to develop effective pricing strategies and tactics.

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  • Reuben Swartz

    January 14, 2008 at 11:52 am

    Great post. I’ll add a link from my site (Dollars and Sense: the Pricing Blog).

  • Jonathan

    January 13, 2009 at 12:59 am

    What are some disadvantages of price segmentation?

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