Price segmentation usually means selling the exact same product to two different people at different prices. For example, two people sitting in coach class on a flight have purchased essentially the same service and experience, but usually pay different prices. Another example is that students pay less to get into the movies.
However, the most common method of price segmentation is all around us and is sometimes hard to recognize as what it is, price segmentation through product differentiation. That is selling different levels of products to different people at dramatically different prices.
I went through the Burger King drive through the other day and ordered a Whopper for $2.39. They asked if I’d like cheese and of course I said yes. My Whopper with cheese was $2.69. The cheese was 30 cents! For a slice of CHEESE?
So how is this price segmentation? People who are very price sensitive would never pay 30 cents for a slice of cheese. But people who aren’t so price sensitive would. This type of price segmentation is frequently called versioning. As the name implies, we create different versions of a product for customers with different willingnesses to pay. In this case we had two versions, a Whopper with cheese and one without.
I still remember shopping for my first brand new car about 20 years ago. After I picked out the car, it was time to decide on the options. Do you know that a radio for that car costs an extra $1,000. I could buy a radio with speakers at an electronics store for less than $100. What a ripoff. (I ended up buying a radio later and installing it myself.)
The car dealers were simply using price segmentation. They could still sell the bare bones car to someone like me to make a little profit. But when someone who is less price sensitive (willing to pay more) they make even more profit by also selling the radio as well.
In contrast, these days, cars come with options “packages”, so it’s very difficult to determine if you’re paying too much, but it’s still versioning.
We can’t leave this topic without talking about airlines. I recently looked up the price of a flight from San Francisco to LaGuardia in New York. The coach seat was $310, the first class seat was $3,000. WOW! That’s price segmentation. Anybody wealthy enough to afford the first class ticket would probably purchase it just to be more comfortable for the 5 hour flight, but anyone who is price sensitive would definitely not.
Versioning is not new. Here is a quote from a 19th century economist on the railway travel business. “It is not because of the few thousand francs which have to be spent to put a roof over the third-class carriages or to upholster the third-class seats that some company or other has open carriages with wooden benches. What the company is trying to do is to prevent the passengers who pay the second class fare from traveling third class; it hits the poor, not because it wants to hurt them, but to frighten the rich.” Jules Dupuit, 1849 Did you catch that? Third class rail travel was hard benches WITHOUT A ROOF. I’m sure the airlines are trying to think of a way …
More on versioning in a later blog.
Action: What products do you currently sell with different versions? Are you charging enough for the highest level? Are you charging too much for the lowest level?