For most businesses, customer segmentation -- the act of dividing customers into similar groups for the purpose of targeting -- is something that you did as a marketing exercise many years ago or at best, at the beginning of last year. In a challenging economy, a different and very powerful kind of segmentation called price segmentation can help you to make the most of each sale you get and stop leaving money on the table with each sale.
Price segmentation is the practice of offering different prices to different customer segments with an eye on maximizing the profitability of each segment. For most businesses, it is highly lucrative, though it can take some effort and planning to get started. Price segmentation works better when you have real customer need-based segments that you can effectively isolate from one another, but those are not prerequisites to success.
Pricing is a powerful marketing tool. Use it wisely. Let's say that you have a product that sells for $5, but some customers will pay up to $8 for it, while others value it at $3. Through effective price segmentation, you can create opportunities for each customer to purchase your product at the price that is most relevant to them and most profitable for you.
Price segmentation happens every day, perhaps you've experienced some of these examples:
- Time based, as in hotels or attractions that are more or less expensive on weekdays or weekends.
- Location based, where you find or consume the product will affect its pricing, such as buying at a supermarket vs. a gas station.
- Control brands, such as private label products vs. national brands
- Solution sales, when a company packages a solution to a problem instead of a single product.
- Customer segments, such as member vs. non-member prices for products and services.
Getting started with segmented pricing is doable for most organizations by working through the most important aspects of price segmentation.
- Define your customer segments by benefit. What benefits do they derive from doing business with you? You can price differently based on convenience, level of service, time of service and loyalty.
- Look at your distribution channels. This is an easy way that many companies use to segment their pricing
- Use price segmentation as an opportunity to innovate or bundle products and services to create completely new offerings that offer more value that you price accordingly.
- Consider offering programs for your customers that allow them to pay upfront from pricing discounts later. Starbucks Gold Card program costs $25 upfront, but offers 10% off on all drinks. This helps them retain their most loyal customers who often spend upwards of $100 per month. They have the added benefit of customers self-segmenting into a category that Starbucks can market to for even greater return.
Price segmentation isn't a marketing tactic for every business, but if you can work through the process above and align your customer segments with specific pricing, you'll no longer be leaving money on the table.
