Price Segmentation: Justify it or Hide it

Rich-Poor (LQ)Nobody wants to pay more.  They don’t want to feel “ripped off”.  They want to feel special, like they received a good deal.

However, it is in a firm’s best interest to charge different customers different prices based on how much they are Willing To Pay (WTP).  If a customer is WTP more you want to let them.  If a customer is only WTP less, you may still want them as a customer so you charge them less.  We’ve blogged several times about how to execute pricing segmentation (Customer characteristics, transaction characteristics, behaviors, and product portfolio), today we are talking about what your customers should know.

Since your customers don’t want to feel cheated, then you only have two choices on how to communicate price segmentation:  justify it or hide it.

Customers see price segmentation all of the time and have come to accept it.  For example, students pay less at the movie theaters.  Vacationers pay less for flights than business travelers.  These are visibile and “justified”.  Here are several ways to think about justifying pricing segmentation:

  • Publish your highest list price.  Offer discounts to customers who “deserve” them.
  • Volume discounts.
  • Lower cost to serve some customers.
  • Need to sell excess supply.
  • Helping the poor (senior citizens, students, etc.)
  • Don’t change the rules often.  Once your customers know and accept them, leave them alone.

You don’t need to actually justify your price segmentation, but your customers need to able to justify it in their minds.  Nobody at the airlines ever justified why business travelers should pay more, but they can explain why they should fill empty seats with vacation travelers at a lower price.  Nobody ever explained why some people pay full price while people who use coupons pay less, but you can justify that in your mind.  It’s always easier to explain why you give one group a discount.

Many companies hide their price segmentation.  They don’t allow customers to know their complete pricing strategies.  They don’t allow customers to know their best pricing.  Here are several techniques to hide your pricing segmentation:

  • Don’t publish a price list.  Nobody knows what they should pay.
  • Give every customer a unique quote.  Don’t share that information.
  • Put your best prices in contracts.
  • Make pricing so complex it’s difficult to compare.

Warning:  Hiding prices is never perfect.  In the B2B world, buyers change companies and mergers and acquisitions happen.  Price information gets leaked.  In the B2C world, once someone finds hidden price segmentation, they write articles about it.  Remember when Amazon charged different prices to different zip codes?  The lesson, even when hiding prices, you will want to be prepared to justify them if they leak.

Price segmentation is a powerful tool that every company should use.  However, you must use it carefully.  When somebody feels cheated by your company, you may lose them as a customer forever.

In the end, you will likely use a combination of hiding and justifying price segmentation.  Even when price segmentation is justifiable, there is no need to flaunt it.  And even when you hide it, you will someday need to justify it.  The best option for you is likely … hide it AND justify it.

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

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