4 Proven Techniques Using Price Segmentation To Maximize Profits

You know you can make more money when you can charge different prices to different customers. This is price segmentation as discussed in my previous blog post, "How To Use Price Segmentation To Maximize Retail Profits." The ultimate goal is to charge each customer whatever he or she is willing to pay. Of course this isn’t always possible, but here are four techniques you can use to increase your price segmentation.

1. Customer Characteristics

Think about which of your customers are willing to pay more and which are more price sensitive. In general, what is different about these two types of customers besides their willingness to pay?

For example, retired people tend to be more price sensitive than working people, probably because they are living on a fixed income and have plenty of time to shop around for great prices. Can you think of a way to offer the same product to both working folks and retired people, but at different prices? Many companies offer senior discounts. This is price segmentation based on customer characteristics.

Some companies offer lower prices to students. Some businesses offer lower prices to locals. Some businesses offer different prices to different genders depending on the product and customer’s willingness to pay. What customer characteristics can you think of that may correlate with willingness to pay?

Remember to charge your highest price as list price and offer discounts to those that are more price sensitive.

2. Behaviors

With this technique, you set your normal high list price and offer discounts to customers who “prove” they are price sensitive. This proof typically comes in the form of the amount of effort they are willing to put into getting a lower price.

Coupons are the classic example of this type of price segmentation. A customer who uses a coupon must find the coupon, clip it out, carry it around, and remember to redeem it. She is putting in effort to get a lower price. People who are not price sensitive will not put in that effort.

Think of these as hurdles you put in front of your customers. On-line retailers can also use coupons, but what else could they do? How about offering a discount to customers willing to take a survey? The survey data is a nice benefit, but the real goal is to separate the price sensitive from the price insensitive.

Loyalty clubs or cards are another way to create a hurdle, especially if you charge for the card. Amazon Prime is a great example of a hurdle where price sensitive customers who purchase a lot from Amazon will join Prime, while those who are not price sensitive probably will not.

3. Transaction Characteristics

Two years ago the San Francisco Giants started using dynamic pricing, charging different prices based on the characteristics of the game. My favorite characteristic was weather. On bad weather days you could get a discount at the box office.

This is changing prices based on the situation at the time of the transaction. Weather for a baseball game is a great example. How about discounts when a restaurant is empty? How about matinee pricing to bring customers to the movies in the afternoon? As retailers you have the ability to offer volume discounts, or, better yet, when someone is ready to check out offer 25% off anything of lesser value if they buy it now. On-line retailers may be able to offer discounts for slow delivery.

Each of these is learning something at the time of the transaction and associating customer’s willingness to pay.

4. Product Portfolio

This is the most powerful and ubiquitous of price segmentation techniques. We will save it for our next blog post.

Summary

The key to each of the three price segmentation techniques discussed here (customer characteristics, behaviors, and transaction characteristics) is that you start with a high list price and then offer discounts to those with a lower willingness to pay. Going the other way makes your customers very unhappy -- and lowers your profit!

I'd like to hear your thoughts and experiences re price segmentation. Mark

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Mark Stiving

About Author

Mark Stiving is a San Jose, Calif.-based pricing expert with 15 years' experience speaking, writing, coaching and consulting to help firms increase profits through value-based pricing. He is the author of Impact Pricing: Your Blueprint for Driving Profits; he blogs at PragmaticPricing.com and shares pithy thoughts on Twitter using @MarkStiving.
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