How to Price EP 8: Why Price Segmentation?

Summary

In this video, Mark Stiving, Chief Pricing Educator at Impact Pricing, discusses the power of price segmentation as the second most profitable pricing decision a company can make. Price segmentation involves charging different prices based on customers' willingness to pay, maximizing revenue. Through an example with two buyers—Chris and Sam—Stiving shows how charging a uniform price can result in lost opportunities, while price segmentation can lead to higher profits. He emphasizes that adopting this strategy, along with value-based pricing, can significantly boost a business’s bottom line.

Takeaways

• 😀 Price segmentation is one of the most profitable decisions a company can make in pricing strategy.
• 😀 The first most profitable pricing decision is adopting value-based pricing, with price segmentation being second.
• 😀 Price segmentation involves charging different prices to different customers based on their willingness to pay.
• 😀 Companies should aim to charge higher prices to customers willing to pay more while still offering lower prices to attract those with lower willingness to pay.
• 😀 A poor pricing decision, like charging a flat price of $75, may reduce total revenue compared to using price segmentation.
• 😀 When applying price segmentation, the goal is to charge $50 to customers like Chris (low willingness to pay) and $100 to customers like Sam (high willingness to pay), maximizing total revenue.
• 😀 By segmenting prices based on willingness to pay, companies can increase their revenue beyond what a single flat price would generate.
• 😀 Estimating customers' willingness to pay is key to successful price segmentation, even though it may not be known exactly.
• 😀 Price segmentation can be achieved through discounts in some places or by offering different pricing structures.
• 😀 Implementing price segmentation involves understanding your market and setting prices that reflect customer willingness to pay, leading to greater profitability.

Q & A

What is price segmentation?

Price segmentation is the practice of charging different prices to different customers based on their willingness to pay, aiming to maximize revenue by aligning the price with what each customer is willing to pay.

Why is price segmentation considered the second most profitable pricing decision?

Price segmentation is the second most profitable pricing decision because, after adopting value-based pricing, it allows businesses to capture more revenue by charging customers based on their individual willingness to pay, leading to higher total revenue.

What is the first most profitable pricing decision mentioned in the script?

The first most profitable pricing decision is adopting value-based pricing, which means setting prices based on the perceived value to the customer rather than just cost or competition.

What is the mistake made when choosing a price of $75?

Choosing $75 is a mistake because, in the scenario, it only attracts Sam, who is willing to pay $100, while Chris, who is willing to pay $50, doesn't buy. This results in lower total revenue ($75), which is less optimal compared to other pricing strategies.

What happens when a business chooses a price of $50?

When the business charges $50, both Chris (who is willing to pay $50) and Sam (who is willing to pay $100) buy, resulting in a total revenue of $100, but this leaves money on the table as Sam could have paid more.

What happens when the price is set at $100?

At a price of $100, Sam buys but Chris, who is only willing to pay $50, does not. This results in a total revenue of $100, which is the same as when the price was set at $50, but the business misses out on potential revenue from Chris.

Why is price segmentation the best approach in this example?

Price segmentation is the best approach because it allows the business to charge Chris $50 and Sam $100, which aligns with their willingness to pay and maximizes total revenue, resulting in $150, which is higher than any other fixed price point.

How can a company estimate customers' willingness to pay?

A company can estimate customers' willingness to pay by analyzing market behavior, customer data, and using strategies like surveys, historical purchase patterns, and segmentation tools to predict what different customers are likely to pay.

What is the role of discounts in price segmentation?

Discounts in price segmentation are used to attract customers with lower willingness to pay. By offering discounts strategically in certain segments, businesses can still win those customers while maximizing revenue from others who are willing to pay more.

What is the main takeaway from this lesson about pricing?

The main takeaway is that adopting price segmentation is a highly profitable strategy that allows businesses to optimize their pricing by aligning it with the customer's willingness to pay, leading to higher overall revenue.