How To Get Your Customers To Like Price Segmentation

Can you charge individual customers different prices? Are you doing it? The secret is to do it in a way that they'll like and appreciate. In 2000, Amazon.com famously did some price testing that caused customers to be quoted different prices for the same product -- and got in trouble for it. Jeff Bezos, the CEO of Amazon, claimed it was "random price testing." Some people thought it was price segmentation based on geography. Regardless, consumers were furious once they found out that some people got lower prices than they did.

What price segmentation lesson can we take from the Amazon situation? Is it possible to charge different prices to different people without causing their wrath? The answer lies in one of my favorite segmentation stories:

In 2005, Coca Cola got in trouble for price segmentation. They wisely “automated” the pricing of vending machines so they could change prices depending on the temperature outside. (This is segmentation based on characteristics of the transaction.) However, they used press releases to announce to Wall Street that they were going to raise prices on hot days. When consumers heard of this, they rebelled, and Coke ultimately reversed their decision.

The lesson of this story, though, comes from what Coca-Cola could have done to make everything acceptable: Accentuate the positive. Instead of saying they were going to raise prices on hot days, they could have announced: “On cold days we are lowering the price of a coke”. Notice the difference in perspective: Raise prices on hot days vs. lower prices on cold days. Exact same thing, but one looks like they are gouging their customers, the other like they are helping.

This small change in perspective has a huge change in perception.

It is possible to segment prices without upsetting customers. The lesson for segmentation is to start with a high price, then offer a discount for an acceptable reason.

Back to Amazon: Amazon got their hand slapped for using random price testing to find the right price points, making them much less likely to use price segmentation going forward. However, the Coke story tells us that all they needed to do was offer a justifiable reason to give a discount.

The recent article in the New York Times, "Shopper Alert: Price May Drop for You Alone" shows that major grocery stores are now offering individual offers, prices, and discounts to specific shoppers based on shoppers’ behaviors that could encourage them to spend more -- which is the ultimate in price segmentation.

Notice the lack of complaining so far. Retailers are counting on the idea that everyone is happy when they get a discount, because it means they get a better price for a product they want; and those that don’t get a discount really didn’t "earn" one.

Now to your business: Are you tracking what each customer buys? Are you using that data analysis to help you define and offer discounts? If not, you should be.

Here are a few easy examples:

* Search your data to find two items that many people buy together. Then, when someone who historically only buys one of these items comes back to the store, offer them a discount for the other. 

* Search your data for people who intermittently buy some quantity of a product. Offer them a discount if they buy double the amount.

Another powerful one:

* Identify customers who usually buy a specific brand of a product. Sell the "ability" to a competing brand, to offer a discount. For example, if someone usually buys Lay's potato chips, Pringle's might pay to offer a discount to entice customers to switch.

Each of these examples is based on repeat customers and individualized offers. If your business is not based on repeat purchases, you can statistically do something similar by collecting information about your customers that do purchase; then look for future shoppers with similar demographics and offer them the appropriate discounts.

Every business is different, but the lesson for segmentation is start with the "right" price, then offer discounts for acceptable reasons, such as loyalty -- try to get them to buy more of one item, get them to sample a related product, or to try a similar, but competing item.

It seems that shoppers all want a discount and will hate you if they think you’re gouging them. With price segmentation, set your prices high and offer discounts to the right people for the right reasons and you will win more customers and make more money.

How do you use price segmentation to make more sales for more profit?  Thanks.  Mark 

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Mark Stiving, Guest Contributor

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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