Our final article in this pricing strategy series is on price segmentation. This strategy is when you offer the same product or services but at different (or unique) prices to different types of customers. This pricing strategy has proven to increase overall profit and revenue—especially in industries with high fixed cost structures.
What is price segmentation?
Imagine you have a product priced at $10.
Some potential customers may see this price as too high and never convert. Other potential customers may be willing to pay $15. If you only set the $10 price, you lose $10 from the people who won’t buy, but at the same time lose $5 from the people who would have paid more, for a total loss of $15.
But if you have three prices—$5, $10, and $15—you get the $15 from the higher price segment, plus the $5 from the lower price segment, and you end up with a total of $20.
At first glance, it may seem there’s no way this can work. But think about the airline industry.
Will price segmentation boost profitability?
With segmentation, a variety of prices are offered for the same seat on a flight; the seat is the same, but the price varies based on the type of customer making the purchase. This is pricing based on customer segmentation and the impact on the bottom line can be huge.
In just about any sales-driven customer acquisition, your sales team might have an array of prices it’s willing to offer customers for the same product depending on how negotiations go. Discounts can be applied over months or even years to secure customer loyalty and longer lifetime value (LTV).
Customers can be segmented by volume, attribute, service offering, time of purchase, time used, or more. From a billing perspective, your system will need to set different attributes for customers and apply price changes and discounts to specific segments.
Flexible billing software automates this process to ensure accurate billing every time.
7 Examples of price segmentation
Here are some of the popular ways to use segmentation as a pricing strategy.
- Channel purchase: For example, online vs. in-store purchase. Customers that purchase online can be offered a lower price because the cost to serve this purchase is lower.
- Time used: For example, many resorts charge more for their vacation packages depending on the time of year. Frugal travelers will travel to sunny destinations in late March for better deals while other travelers will pay more to get away from the January deep freeze.
- Time of purchase: For example, many items are priced higher before the holidays and drop in price after. In the fashion industry, fashionistas will pay a premium to wear the latest styles while those on a budget will wait for the end-of-season clearances.
- Location: For example, theaters and concert venues charge based on how close you are to the stage.
- Volume: This one is very common, the larger the volume you order, the lower the price per unit. Consider Software as a service (SaaS) for example. If you pay month by month for a subscription plan, you’ll pay one cost. But if you pay annually, your cost per month is often less for the same product.
- Attribute: For example, first class vs coach or hardwood vs laminate.
- Service offering: For example, a plane ticket that’s non-refundable is usually less expensive than one that’s fully refundable.
This is not meant to be an exhaustive list of segmentation pricing strategies. If you have any other examples, please add them in the comments.
How it can go wrong and some things to consider
While this pricing strategy can be very powerful, there are challenges to segmentation that can reduce its impact. Here are some things to watch out for.
- Dilution: It’s possible that customers who would pay your higher price will find ways to buy at your lower price.
- Backlash: If you’re not careful, higher-paying customers may not see the value they’re receiving from the premium price they’re paying and will feel taken advantage of. Make sure to keep perceived value in mind when creating and promoting your segmented prices.
- Stagnation: Don’t make the mistake of implementing your pricing strategy and forgetting it—iterate on your pricing. You should always be researching and exploring new ways to add value to your product or service.
Used properly, the segmentation pricing strategy can be very beneficial. However, it’s not the best fit for every business, so make sure it’s right for your company before selecting a pricing strategy.
To read more on our pricing strategies series, check out:
Quick FAQs about Improving Pricing Strategy with Price Segmentation
Q: What is price segmentation, and how can it improve your pricing strategy?
Price segmentation is a strategy that allows you to offer the same product or services at different or unique prices for different types of customers. By catering to different customer segments’ willingness to pay, price segmentation can increase overall profit and revenue, especially in industries with high fixed-cost structures.
Q: In which industries can price segmentation be particularly effective?
Industries with high fixed-cost structures can especially benefit from price segmentation. One example is the airline industry, where different prices are offered for the same seat on a flight, depending on the type of customer making the purchase. Sales-driven customer acquisitions are also well suited for price segmentation as different discounts can be applied to secure customer loyalty and longer lifetime value.
Q: What are some popular ways to use segmentation in a pricing strategy?
- Channel purchase (e.g., online vs. in-store purchase)
- Time used (e.g., time of year vacation packages are purchased)
- Time of purchase (e.g., items priced higher before holidays and lower after)
- Location (e.g., theater and concert seating based on distance from the stage)
- Volume (e.g., lower price per unit with higher volume purchases)
- Attribute (e.g., first class vs coach or hardwood vs laminate)
- Service offering (e.g., non-refundable vs fully refundable plane tickets).
Q: What are some challenges to consider when implementing price segmentation?
- Dilution: There is a risk that customers who would pay your higher price will find ways to buy at your lower price.
- Backlash: Higher-paying customers may not see the value they are receiving from the premium price they’re paying and could feel taken advantage of.
- Stagnation: After implementing price segmentation, don’t neglect to continually research, explore, and iterate on your pricing strategy to maintain and add value to your product or service.
Q: Is price segmentation the right fit for every business?
While the segmentation pricing strategy can be beneficial, it is not the best fit for every business. It is crucial to evaluate your company’s needs, customer base, and market conditions to determine if price segmentation is an appropriate pricing strategy.