Price segmentation is THE MOST POWERFUL TOOL you have at your pricing toolbox. Every company, big or small, must be thinking about price segmentation.
What is it? Price segmentation is simply charging different prices to different people for the same or similar product or service. You see examples every time you go shopping: student prices at movie theaters, senior prices for coffee at McDonald’s, people who use coupons and many more. The industry that probably does price segmentation better than any other is airlines. It seems that no two people on a plane payed the same price.
Whether you’re a retailer, restaurant, software company or building physical products, price segmentation applies to you.
The academic literature (sorry for saying that word) describes many characteristics and requirements for price segmentation, but in reality, there are only 2 steps to implement it: 1. segment the market and 2. create a mechanism to charge them different prices.
1. Segment the market – The first requirement is to find groups of customers, some that are willing to pay more than others. To keep this simple, let’s hold it to 2 segments, those willing to pay more and those willing to pay less. Let’s call them the “rich” and the “poor”. This is a pretty common segmentation anyway. In general poor people are more willing to invest time, energy and effort to get low prices, while rich people are more likely to just buy what they want.
2. Create a pricing mechanism – This is much harder than it seems. You can’t simply put up a sign in your store that says “Rich people – $10; Poor people – $5”. Nobody would ever confess to being rich. You need a way to get the rich people to voluntarily pay the higher price.
The best way to learn price segmentation is to go through examples. Let’s look at students at the movie theater. The movie industry has determined that most of us (non-students) are the “rich”, and students are the “poor”. This may not be perfectly true, but in general it would be fair to say that students who don’t have full-time jobs are less well off than those of us that work for a living. However, the movie industry still wants them to come to the theaters so they want to charge them less. The way they do this is to offer a discount to students, and in order to get the discount, you have to show a student ID. That way most of us pay the normal price and students get a lower price.
Let’s broaden this a little. Showing a student ID to get a discount at the theater is an example of a broader type of price segmentation: ID for discount. This is used in other ways as well, like when seniors show an ID for a discount.
Action: How can you ask for an ID to give a discount? Will seniors or students pay less for your product service? If no, begin thinking of other price segmentation methods you may be able to use.
In the next several blogs we will look at more examples of price segmentation in action.