Price Structure and
Segmented Pricing
MK814
Gerald Smith
The Pricing Strategy Pyramid
Price
Level
Price setting
Pricing
Policy
Negotiation Tactics &
Pricing Setting Procedures
Value Communication
Communication, Value Selling Tools
Price Structure
Metrics, Fences
Value Creation
Economic Value, Offering Design, Segmentation
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Pricing Menus Map Price Structure,
Help Customers Trade Up or Trade Down
A “Fixed Price, Flexible Offer” Menu
Offerings
Available
Economy
Fast Turnaround
+25%
Special
Processing
Not Available
Long-term
Contract
Unbundled
Service
Not Available Base Offer
(85% of standard)
Standard
+15%
Service A + 3%
Service B + 7%
Service C + 12 %
-10%
-15%
Premium
Included
A,B,C Included *
Service D + 9%
Service E + 6%
Required
- 15%
(130% of standard)
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Examples of Price Sensitivity
Which segments are more price sensitive?
• Personal vs. Business Travelers
• New to Market vs. Experienced Buyers
• Light Users vs. Heavy Users
• Students/Retired vs. Employed
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Steinway’s Historic Segmented Pricing
Steinway, a tiny but well regarded New York piano maker in
the 1850's grew quickly after Doretta Steinway, the founder's
daughter, got the idea of offering free piano lessons with the
sale of each piano
– Can you explain this as a segmented pricing tactic?
– What are the segments and why would their price sensitivities be
different?
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Examples of Cost To Serve
Which segments are more costly to serve?
• Peak vs. Off-Peak Purchasers
• New Customers vs. Established Customers
• Light Users vs. Heavy Users
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Non-Segmented Price-Offerings
Missed Opportunities
Unharvested
value
One size fits all
offering
p1
Med
Missed
Opportunities
B
A
C
D
Value Received
High
Low
Segments
During the recession, the trend was to bundle value-added
services into core offering to defend price points and close deals
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Tiered Offerings Map to Value to Improve Profitability
Prod. 4
Value
Prod. 3
High
Prod. 2
Prod. 1
A
B
C
D
Low
Segments
Differences in value can be captured with product variations
or service augmentation that creates natural fences between segments
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Other Examples of Product Variations
Standard SRP $219.99
Basic SRP $199.95
Professional SRP $299.99
All in Standard +
MS Access
Pro SRP $279.95
All in Basic +
Create Customized forms,
Tools to Track add’l items
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Developer SRP $529.99
Development Tools to Build
Own Applications
Premier SRP $399.99
All in Pro +
Daily Sales Summary,
Retail Specific Reports
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Sometimes the Offering Can’t be Unbundled…
… in these instances, look to pricing
metrics to capture value differences
High
One size fits
all offering
- p3 -
Med
- p2 - p1 -
B
A
C
D
Value Received
- p4 -
Low
Segments
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Examples of Value-based Pricing Metrics
Market
Traditional Metrics
Value-based Metrics
Real Estate Want Ads
$ / column inch
$ / property value
Aircraft Engines
$ / engine
$ per hour of use
Information service
$ / minute
$ / download
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Segmented Pricing Fences:
Tactics For Separating Markets
•
•
•
•
•
•
•
Buyer Identification
Time of Purchase
Purchase Location
Volume or Purchase Quantity
Product Bundling
Tie-Ins
Metering
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Segmenting By Buyer Identification
Charging different prices to different buyers based on
observable characteristics that signal buyers' price
sensitivity.
• Buyers in different segments must have different
characteristics that either are obvious, or that buyers can
be induced to reveal.
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Segmenting By Time Of Purchase
Charging higher prices at times when less price sensitive
buyers naturally purchase, and charge lower prices at
times when it would be inconvenient for them to purchase.
• There must be a natural difference in time-of-purchase
patterns for different segments of buyers.
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The Well-Structured Department Store
A department store has an interesting discounting policy for brand-name quality
clothing
•
The ticket on each item is dated and lists a number of prices.
–
–
–
–
–
The first price is the one that a customer pays if the merchandise is bought within the first eleven
days after arrival.
The next price is discounted an additional 25% and applies to merchandise that is 12 to 17 days
old.
The third price is discounted 50% and applies to merchandise 18 to 23 days old.
The fourth price is discounted 75% and applies to merchandise that is 24 to 29 days old.
On the 30th day, the merchandise is turned over to charity. Since most of the merchandise is
surplus, there is generally a limited supply in each style, color, and size.
•
What does this strategy accomplish?
•
Describe the customers whom you suspect make up the different retail segments.
•
A number of stores in other cities adopted this strategy for surplus merchandise, but no store
had adopted it for new merchandise. Can you suggest why?
•
For what other types of products would you consider this a profitable pricing tactic?
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Peak Load Pricing:
Segmenting By Time Of Purchase
Peak-load pricing is used to segment markets by the cost of
serving them at different times?
• Name types of businesses, other than public utilities, that could
effectively use peak-load pricing. Describe how a peak-load
strategy might be implemented in each case.
• Yield management represents a more sophisticated version of
peak-load pricing. What kinds of companies use yield
management?
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Smart Steak House
A fancy steak house in a shopping mall offers a 20% discount
to employees of other stores in the mall, provided that they
eat before 6:00 PM or after 8:00 PM
– Can you explain the rationale for this strategy?
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Delicious Deli
A deli in a college town has an interesting pricing strategy for
students. The dinner specials at the restaurant are normally
$4.95. Students, however, can buy weekly "meal tickets" that
give them three meals for $13.90, 5 meals for $22.25, or seven
meals for $29.90. The tickets expire at the end of each week
and they are not transferable
– Can you explain this pricing strategy?
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Segmenting By Purchase Location
Charge higher prices at places where less price sensitive
buyers purchase
• Price sensitive and price-insensitive buyers naturally purchase
at different locations or…
• Insensitive buyers will not change purchase location to take
advantage of the price difference
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Segmenting By Volume Or Purchase Quantity
When price segments differ in the quantities they buy, charge
different prices for different quantities
• If buyers are in competition, must be cost-justified
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Segmenting By Product Bundling
Selling different products either as an indivisible bundle, or
only at higher prices if separated
• Buyers must differ in their relative valuations of the bundled
goods
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Two Examples
Salido’s Salad and Sandwich Shop
The local outlet of a fast food chain charges $2.60 for a salad from its
salad bar if ordered a la carte. When ordered with a sandwich,
however, the salad bar costs only $1.99. In either case, the
customers are permitted to fill their bowls just once
– Can you explain this segmented pricing technique?
Hotel Service Policies
Most hotels will lend guests an iron and an ironing board free of
charge, despite the fact that this service competes with the hotel's
valet service, for which it does charge. Those same hotels usually
charge outrageously to supply glasses, ice, and mixers for those who
wish to have alcoholic drinks in their rooms.
– Can you explain this anomaly?
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Bundling for Automobile Sports Package
Racing Stripes
and Hubcaps
Segment
Racing
Enthusiast
Outdoor
Enthusiast
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Right Mirror
Heavy Suspension
$200
$150
$100
$300
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Segmenting By Tie-ins
An explicit or implicit requirement that buyers of an asset
purchase consumables used with the asset only from the
seller
• Buyer's value of the asset is proportional to use intensity
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Segmenting By Metering
Rental or lease arrangements with a variable rental fee
dependent upon a metered usage rate
• Buyers' value of the asset is proportional to use intensity
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