The Surprising Secret to Successful Price Segmentation

Guest blogger, pricing expert and author, Mark Stiving, wrote a great post for Upstream Commerce a few days ago on How to Get Your Customers to Like Price Segmentation. Mark highlighted how price segmentation can cause more trouble than it’s worth for retailers, and discussed ways to avoid the downsides while holding onto the additional profit. Now let’s go a step further and discuss the big secret of successful price segmentation -- the way of thinking about price segmentation that will make your business more profitable and your customers happier... 

Here it is:

Stop thinking about price segmentation.

You read that right, and that’s coming from a pricing guy: Stop thinking about price segmentation.

Start thinking about your customers. When you think about what they need and want, you see that there are various ways to do value segmentation. Only after you have done the value segmentation, should you think about how to differentiate pricing. And only after you have set up a preliminary pricing model should you look at the costs. You may have to go back and adjust all or some of your model, based on your costs. The point is to start from the customer and work your way inward, not from your own business outward, to the customer.

For example, Amazon Prime (Amazon Prime is a service of free two-day shipping on all eligible purchases, for a flat annual fee, as well as discounted one-day shipping rates: Wiki) is not simply a way for Amazon to charge a membership fee. They wanted a way to get goods to customers quickly and cheaply, and make Amazon part of the everyday shopping experience. To encourage customers to buy, and to cover lost shipping revenue, they applied a membership fee, like Costco. Customers who are “Prime members” receive a different price, buying the same thing and receiving it at the same time, compared to other buyers.

A step removed is offering the same product at different prices depending on delivery times. Need it tomorrow? You’ll pay a lot. Seems “fair.” What about a discount for recurring delivery of certain items on a regular schedule?

What about looking at how your customers want to interact with you? If they are members of a loyalty program, they may qualify for special discounts or perks, like expedited shipping. Perhaps they can earn points, products, discounts, or other things they value by referring friends, either directly or through social media (like Dropbox). (Customer-based discounts are also easier to test over the long term than simply randomly changing prices. You can find out what customers really care about).

This differentiation based on value also helps with customer perceptions of price segmentation. If customers can perceive a clear difference in value, they expect a difference in price. No one expects to pay the same price for a new Hyundai and a new Ferrari, even though they do about the same thing, and the Hyundai is far more practical. Customers aren’t outraged that Amazon Prime members get free shipping—they know they can sign up for the same deal if they want it—they were outraged when customers got different price for the exact same thing.

The recent controversy around Orbitz's showing Mac users more expensive hotel rooms (Tech PR Review) illustrates this point. Orbitz noticed that Mac users tended to book more expensive rooms, so they showed those browsers more of what they seemed to want. The story evolved that Orbitz was showing higher prices for the same rooms, which would not be “fair”.

Takeaway: 

Price segmentation is essential for profitability, but looking at your customers through the lens of price segmentation often leads to angry customers and disappointing results. Instead, look through the eye of the customer, and build offers that deliver value to them. Sure, the different offers will have different prices, but customers will appreciate it if they feel they are in control of what is important to them, and your business will gain not only the financial benefit of better segmentation, but also the benefit of contributing more to your customers’ lives.

Share this post
Reuben Swartz, Guest Contributor

About Author

Reuben is a world-renowned expert on pricing, and combining pricing strategy, business processes, and technology to dramatically improve profits and boasts "the longest running blog on pricing and profitability". He has helped companies in North America, Europe and Asia and he teaches part of the Professional Pricing Society's Certified Pricing Professional program. You can follow him on Twitter or on Dollars and Sense: The Pricing Blog. Reuben's company, Mimiran, provides software to help business owners and sales teams create, share and close online proposals, while improving revenue and profit and helping companies focus on their customers.
Follow us

Comments are closed.