Businesses and startups are growing at a good pace in this era. All companies seek effective marketing strategies to gain a broader customer base and generate more profits. To complete this target, you can opt for the price segmentation and price discrimination strategy. It is simple to implement and shows significant results in the business concisely. This guide consists of the definition, benefits, types of price segmentation, and how you can practically implement it in your industry.
What is Price Segmentation?
Price segmentation is a pricing strategy in which companies charge different prices to different customer segments for the same product or service. It helps in generating more revenue and profits. Here, the customer or market is segmented based on other customers’ different characteristics, purchasing behaviour, geographical area, or purchase power.
The business with high fixed costs can profit more by implementing segment prices. You have to determine your customer needs and then segment your prices. For example, a movie theatre owner can have student tickets over the weekends to increase sales by reducing the prices for these specific customer segments.
Why Should You Use Price Segmentation?
Price segmentation is a strategy that provides a heavy boost to your business by closing low-spending customers. It positively impacts your overall revenue. There are various benefits of these price segments.
1. Higher Revenue and Profits
Every product or service has a specific fixed cost. Price segmentation makes the company charge different prices above the specified fee to the different sets of customers. It allows the company to sell their products or services to various customers. It helps you increase your revenue and profits by 10 to 60%.
2. Bigger Market Share
Price segmentation makes you charge different prices to different segments of customers based on their geographical area, characteristics, and purchasing power. For example, the Amazon Prime price ranges around $139/Year in the USA, while its price ranges around $18/Year in India. In this way, the company has gained a broader customer base of different demographics.
3. Flexible and Adaptable Marketing Strategies
Price segmentation makes the business more flexible and adaptable. It allows you to try and test numerous marketing strategies with the changing market needs and customer behavior. You can play with different market segments and create several marketing campaigns.
What is Price Discrimination?
Price discrimination refers to a pricing strategy that charges different prices based on where the customer agrees to purchase. The same product or service is involved here. The price can be lower and higher based on the customer demographics. Generally, the seller tries to charge the maximum possible price to each customer.
It is similar to price segmentation. You have availed your product or service at different prices to different customers. It also has the same benefits as price segmentation. Thus, you can also use both terms interchangeably.
Price Discrimination Types
Price discrimination degrees are generally divided into three types including first-degree discrimination, second-degree discrimination, and third-degree discrimination.
1. First-Degree Price Discrimination
First-degree price discrimination can also be called perfect-price discrimination. It involves charging the maximum possible price for each unit sold. However, it is challenging to determine the paying willingness of the customer. It becomes rare to apply such a pricing strategy.
2. Second-Degree Price Discrimination
Price discrimination second degree denotes charging a different price for an additional quantity of products or services. Simply, you charge less per unit sold in bulk orders.
3. Third-Degree Price Discrimination
Third-degree price discrimination means charging different prices to market segments or customer groups. It is usually used in the entertainment industry, like Netflix, Amazon Prime etc.
7 Simple Steps To Implement Price Segmentation
Identify The Segment or Different Customer Groups
Firstly, you must identify the relevant customer group or segment to implement the price segmentation strategy. You must select the customers based on different demographics, purchasing behavior, location, etc., and fall them into a particular segment.
Determine Varied Pricing
In this step, you need to decide the variables to differentiate the prices in each segment. It can be different product features, quantity discounts, purchases at sale time, or over the customer loyalty level. All these factors should be matched with the pricing strategy of the business.
Monitor The Dynamic Market
The market is entirely dynamic and experiences numerous changes every single day. Thus, you need to observe those changes and mold your strategies. It will help you sell the right products to people at the right time. For instance, most businesses change prices and product offerings during the festive season.
Break Down The Market Segments Into Sub-Markets
Next, you need to segment the market into various sub-markets. It will help you know how many potential buyers are for your products or service offerings. It will also help you learn about the demand for the product and the purchase willingness of the customers. It will allow you to earn the maximum possible profit over the product sold.
Figure Out Each Sub-Market’s Price Elasticity
Figure out the price elasticity of each sub-market by analyzing the changes in customer purchasing behavior. You have to look over the history and number of customer purchases. It will give you an idea of what price should be appropriate for the customers.
Ensure Law Compliance
Price discrimination degrees go through many legal and regulatory considerations, including competition laws, anti-discrimination laws, and pricing transparency requirements. Therefore, any business needs to follow all the rules regarding compliance with segmentation pricing.
Match Up Your Price Segmentation Strategy With Your Competitor
Last but not least, you should match your price segmentation strategies with your competitors. It will help you offer better offerings than the market. Thus, you will successfully implement a price segmentation strategy.
Price Discrimination Examples
1. Promotion Pricing
Promotion pricing refers to the exclusive discounts companies offer over certain products and services. It helps to boost the sales of low-selling or latest products. It is generally offered at lower prices and bundles.
Companies also provide discount coupons to specific customers, encouraging them to make more purchases at a discounted price range. It indirectly segments your market and makes the customer come back to buy.
3. Geographic Pricing
Geographic pricing means deciding the prices based on the region you’re selling. In this pricing model, you sell products at a higher rate in urban areas while you sell at lower speeds in rural areas. It also considers the logistics and inventory costs. Thus, the customers closer to the company generally pay less money.
4. Quality-Based Discrimination Pricing
Quality-based discrimination pricing refers to setting up prices based on the quality of the product. It sells based on the preference of the customer segment.
5. Age Discounts
Age discounts refer to the strategy where companies offer different prices for the same product or service to the varied age of customers. For instance, you offer lower prices to the students and higher prices to the employed people.
6. Quantity Discounts
Quantity discounts refer to providing a discount to the customer if they purchase in bulk. The wholesalers generally utilize this strategy. There can be a complete segment for the bulk purchase. It allows the customer also to get several additional benefits.
7. Customer Loyalty Discounts
Customer loyalty discounts are referred to as providing special discounts to loyal customers. It makes a whole different customer segment for you. They would be highly reliable to your brand.
Price segmentation is one of the effective strategies to gain a broader customer base and generate more profits. It also helps you to have a better loyal customer segment. We hope you like the guide; it has helped you provide a new strategy for your business.