PRICING STRATEGY Premium pricing – The premium pricing strategy

is used by companies that use differentiation as

CHAPTER 1 their generic pricing strategy. Their product
pricing is often higher to pinpoint high value in
their high-end products. Premium priced products
What really is a pricing strategy? are often unique, they are differentiated with a
clever marketing strategy and have a strong
Profitable pricing is crucial for any business. In brand image with lots of innovative features.
ecommerce it is especially important as price is
the number one reason to choose the place to Cost-based pricing – The cost-based pricing
buy for consumers shopping online. Pricing too strategy, also known as “cost-plus pricing”,
high will lower your sales volumes. Price your “markup pricing” and “break even pricing” is
products too low and you will be leaving money based on adding a fixed cost to the cost of
on the table. To decide how to market and price producing a product.
your products, you need a pricing strategy.
Price Match – Matching your pricing to
Pricing strategy simplified competitors’ pricing. This often also includes an
offline opportunity to prove your possibility for a
Pricing strategy is a plan to price your products lower price. The price match is often used by
in a systematic way to maximize profits and your retailers, yet it is a controversial strategy where
marketing message. consumers in the end might be losing as
competitors are unwilling to lower prices.
From early on it is good to remember that pricing
strategies are affected not only by the price alone Research
but also by both internal factors (brand, product Do your research before you rush in and end up
features, customer groups, revenue targets) executing a wrong strategy. Identify your market,
and external factors (competitors’ product goals, product, business, costs, customers, and
features, competitors’ pricing, demand on the competitors. Then, based on your findings, pick
market, economic factors). We will get back to the most fitting pricing strategy and start the
these factors later on. process of taking it into action.
Common pricing strategies used in e-commerce Choose the right person to run the project
As said before, carrying out your pricing strategy
Based on the legendary Porter’s generic may not be a walk in the park. The process is a
strategies, the three main strategies are: lot harder than developing a pricing strategy. An
experienced professional should spearhead the
Cost leadership, a strategy where your company project so nothing is left unnoticed and even the
is focusing on generating value through low costs smallest detail is taken into consideration. Ideally
that enable low prices. the project should be led by someone that has
already dealt with implementing a pricing strategy
Differentiation strategy is based on creating
in the past.
products that generate value to their customers
which make them ready to pay a premium on the Make everyone in your organization
value they receive. You could easily talk about understand and value the strategy
brand value in these cases. Launching a pricing strategy is a team effort.
Every employee of your organization no matter
Focus strategy aims to find a niche mark where
the function they work in, should be well aware of
there is a need and where your company has an
the pricing strategy that you have chosen to
unbeatable competitive advantage over your
deploy, understand the reasons behind it and
competitors, often either through knowledge or
acknowledge the importance of a functioning
clever understanding over technology.
pricing strategy. Prepare your management to be
Simplified pricing strategy examples for ecommerce able to educate other members of your company
about the pricing strategy and to pinpoint the
objectives that are aimed to be achieved with the
Market-based pricing – Products are priced
use of the strategy.
based on their price position on a given market.
Communicate and make sure everyone knows
Cost leadership – Cost leadership is a strategy
what they are supposed to do
where your company is focusing on generating
The process of carrying out a pricing strategy
value through low costs that enable low prices.
cannot succeed if tasks related to it are done in
silos. To ensure that a pricing strategy and pricing
decisions are being carried out properly there
should be a continuous information flow and no to react to an increase or decrease of a price? By
doubts about who is responsible for each part of getting to know your customers it is a lot easier
the process. It is not too uncommon for for you to define the fitting pricing strategy for
companies to divide certain tasks related to a your business.
specific area of business between different
functions. To successfully execute a pricing Competitors
strategy every team taking part in the process There are three main things that you should think
should be on the same page about the strategy. of when thinkin about your competitors. 1. What is
it that they are selling? 2. What price tags do they
Once you get going, don’t just set and forget, have on their products? 3. What is the difference
instead analyze and reoptimize between their products and your products?
When carrying out a pricing strategy, its Knowing what your competitors are selling, how
performance should be monitored continuously. much they are charging and what the differences
Profitability, to be exact. Before launching the between their product and your product are will
strategy be sure to develop pricing metrics for the allow you to price your products better.
strategy. Follow the metrics from the beginning to
keep track of how the strategy is performing. A Costs
simple spreadsheet is enough to mark down and It is simply impossible to develop a pricing
analyze the metrics. The more data you have, the strategy, not to mention set a price for a product
easier it is to reshape the strategy if needed. without knowing how much you are spending to
Remember to analyze the data critically and then produce, store, market, and sell that product.
make adjustments. Remember to think about the complete cost
structure of your business when developing a
Proceed slowly but surely pricing strategy.
No change happens overnight and when setting a
pricing strategy into action, it may take more than Additional tools for enhancing your pricing
only refining your pricing processes. Take small strategy
steps instead of leaps, analyze results, and
reoptimize. By adopting this mentality early on, it Price optimization, pricing automation and price
will benefit you in the long run when and if you monitoring are all concepts that you can deploy to
have to make changes to your pricing strategy. improve your existing pricing strategies and to
develop more informed and better pricing
What are the tools you need for your pricing strategy strategies.

Knowledge is power and when you are creating a Price optimization

pricing strategy, knowledge is a real power tool. Our price optimization is based on artificial
The way a business prices their products/services intelligence and machine learning. The system
should be based on the idea that price is studies prices over time and understands the
constantly living and moving instead of being a demand for each individual product, finally settling
static object. With this in mind, the factors listed for the most profitable price point. To put it simply,
down below should be looked at from the same our tool tries out different prices for your
point of view as they also can change over time. products and eventually finds the optimal prices
that will earn you the most profit.
To keep it simple, let’s focus on the practical
things that you must keep in mind when Pricing automation
developing a pricing strategy: Our pricing automation tool allows you to set
pricing strategies, change prices easily and plan
Your brand & execute campaigns. The tool also makes it
How do people see your company and brand? easy for you to compare your pricing strategy to
When they see your logo, do they think high-end competitors’ pricing strategies.
high priced products or the opposite? Do they
recognize your name instantly or is your brand Price monitoring
completely unknown to them? People tend to pay
more for products that they recognize as high With price monitoring you can make more
quality and in contrast they can relate low price to informed decisions that are based on real data
low quality. regarding your pricing strategies. Price monitoring
allows you to monitor the pricing situation on a
Customers given market, your competitors’ price changes,
Who is your ideal customer to begin with, where campaigns and their stock levels.
are they located, how much are they expected to
pay for your products and how are they expected
 THE ROLE OF VALUE IN PRICING
Strategic Pricing Coordinating the Drivers
The term value commonly refers to the overall
satisfaction that a customer receives from using a
of Profitability product or service offering. Economists call this
ByThomas T. Nagle, John Hogan, Joseph Zale use value— the utility gained from the product.
The value at the heart of pricing strategy is not
The economic forces that determine profitability
use value, but is what economists call exchange
change whenever technology, regulation, market
value or economic value. Economic value
information, consumer preferences, or relative
depends on the alternatives customers have
costs change. Consequently, companies that
available to satisfy the same need.
grow profitably in changing markets often need to
break old rules and create new pricing models. Economic value accounts for the fact that the
For example, Netflix changed the model for value one can capture for commodity attributes of
renting films from the daily rate at video stores to an offer is limited to whatever competitors charge
a time-independent membership model. for them. Only the part of economic value
associated with differentiation, which we call
Producers of new online media created a new
differentiation value, can potentially be captured
metric for pricing ads-cost per click-that aligns the
in the price. Differentiation value comes in two
cost of an ad more closely to its value than was
forms: monetary and psychological, both of which
possible in traditional media.
may be instrumental in shaping a customer’s
Unfortunately, few managers, even those in choice but require very different approaches to
marketing, have received practical training in how estimate them.
to make strategic pricing decisions such as these.
Monetary value represents the total cost savings
Most companies still make pricing decisions in
or income enhancements that a customer
reaction to change rather than in anticipation of it.
accrues as a result of purchasing a product.
This is unfortunate given that the need for rapid
Monetary value is the most important element for
and thoughtful adaptations to changing markets
most business-to-business purchases.
has never been greater.
Psychological value refers to the many ways
The information revolution has made prices
that a product creates innate satisfaction for the
everywhere more transparent, making customers
customer. A Rolex watch may not create any
increasingly price sensitive. The globalization of
tangible monetary benefits for most customers,
markets, even for services, has increased the
but a certain segment of watch wearers derives
number of competitors and often lowered their
deep psychological benefit from the prestige and
cost of sales.
beauty associated with ownership to which they
The high rate of technological change in many will ascribe some economic worth. As the Rolex
industries has created new sources of value for example illustrates, consumer products often
customers, but not necessarily led to increases in create more psychological than monetary value
profit for the producers. Still, those companies because they focus on creating satisfaction and
that have the capability to create and implement pleasure.
strategies that take account of these changes are
More formally, a product’s total economic value
well rewarded for their efforts.
is calculated as the price of the customer’s best
alternative (the reference value) plus the worth of
whatever differentiates the offering from the
CHAPTER 2 alternative (the differentiation value).
Differentiation value may have both positive and
MODULE 2
negative elements. Total economic value is the
Value Creation
maximum price that a “smart shopper,” fully
The Source of Pricing Advantage
informed about the market and seeking the best
value, would pay. Not every buyer is a smart
shopper, however. Often product and service
users, and particularly purchasing agents buying After determining the competitive reference
on the users’ behalf, may not recognize the actual prices, the next step in value estimation is to gain
economic value they receive from an offering. a detailed understanding of customer value
That is, the offering’s perceived value to a buyer drivers and translate that understanding into
may fall short of the economic value if the buyer quantified estimates that can be used to support
is uninformed. Therefore, it’s critical that a pricing decisions.
company’s sales presentations and marketing
communications ensure that features likely to be The first step in quantifying monetary
important to the buyer—particularly competitively value drivers is to understand how the product
superior features—come to the buyer’s attention. category affects the customer’s costs and
revenues. Once the mechanisms for value
HOW TO ESTIMATE ECONOMIC VALUE creation are understood in terms of the
customer’s business model, the next step is to
Marketers have historically invested considerable collect specific data to develop quantified
effort to develop effective value propositions to estimates. In-depth customer interviews are the
represent their company and products. And few best source of information. Very different from
would argue that an effective value proposition, a survey or even focus group methods; in-depth
concise statement of customer benefits, is an interviews probe the underlying economics of the
essential input to brand building and sales customer’s business model and your product’s
conversations. But a general statement of value is prospective role in it. The goal is to develop value
insufficient input to pricing decisions because it driver algorithms, the formulas and calculations
lacks the detail and quantification needed to that estimate the differentiated monetary worth of
shape strategy. In this section, we describe each unit of product performance
techniques that can be used to develop quantified
estimates of customer value that, in turn, can be Therefore, the in-depth interview provides
used to help set more profitable prices. We start a foundation for developing value algorithms and
with a discussion of how to collect and analyze collecting some initial data points to turn those
competitive reference prices. Then we describe algorithms into quantified estimates of customers’
two approaches for quantifying monetary and monetary value drivers.
psychological value and illustrate them with
detailed examples. Estimating Psychological Value

Competitive Reference Prices Psychological value drivers such as satisfaction

and security, by virtue of their subjective nature,
Identifying the next best competitive alternative to do not lend themselves to estimation via
your product and gathering accurate reference qualitative research techniques like in-depth
prices, while conceptually simple, offers a number interviewing. Instead, pricing researchers must
of challenges that often trip up pricing strategists. rely on a variety of quantitative techniques to
Some products, for example, may not have a estimate the worth of a product’s differentiated
single competing product that customers would features. The most widely used of these
consider a suitable alternative. Instead, techniques is conjoint analysis—a technique
customers might construct a basket of different developed in the late 1970s and early 1980s that
products and services as a viable alternative. can discern the hidden values that customers
place on product features. The basic approach is
Another challenge to establishing competitive to decompose a product into groups of features
reference prices is gathering accurate price data and then provide customers with a series of
and ensuring that it is comparable to the pricing choices among various feature sets to understand
for your product. You must ensure that which they prefer. In recent years, marketing
competitive prices are measured in terms familiar researchers have extended the basic conjoint
to customers in the segment (for example, price techniques so that virtually any type of consumer
per pound, price per hour) and are stated in the choice can be tested including choices involving
same units as your product. different brands, budget constraints, and even
purchasing environments.
Estimating Monetary Value
 Using conjoint analysis makes it possible differences that are important to the customer.
to estimate the value of different feature sets in Finally, the customer in-depth interviews required
driving willingness-to-pay and, ultimately, the for value-based segmentations also uncover why
purchase decision. For example, a flat screen TV customers find certain product benefits appealing
can be described in terms of attributes such as —or would find them appealing were they
size of screen, number of pixels, and brightness. sufficiently informed.
In a conjoint study, each of these attributes is
divided into levels that can be tested. For To conduct a value-based segmentation, we
instance, screen size might be broken into 36 recommend a six-step process.
inches, 42 inches, and 52 inches as a means to Step 1: Determine Basic Segmentation Criteria
estimate the relative value placed on greater
screen size. Similarly, conjoint is a common The goal of any market segmentation is dividing a
approach to estimating brand value because it market into subgroups whose members have
enables brand to be treated as any other common criteria that differentiate their buying
attribute. Treating brand as another attribute in behaviors. Choosing appropriate segmentation
the choice decision allows us to understand how criteria starts with a descriptive profile of the total
customers might value a 36-inch Sony TV relative market to identify obvious segments and
to a 42-inch Samsung model. Regardless of the differences among them. In consumer markets,
attributes tested, the value estimates derived from basic demographics of age, gender, and income
a conjoint study can then be used as an input to a provide obvious discriminators.
variety of pricing decisions.
Step 2: Identify Discriminating Value Drivers
The High Cost of Shortcuts
Having preliminary segmentations in hand, you
When setting prices, there are no identify those value drivers— the purchase
shortcuts for understanding the economic value motivators— that vary the most among segments
received by the customer. At the center of this but which have more or less homogenous levels
misconception is the popular concept of customer within segments. This allows you to zero in on
value modeling (CVM), which emerged from the what’s most important to each customer segment.
total quality management movement when
companies tried to measure and deliver superior Step 3: Determine Your Operational
quality at a competitive price. Constraints and Advantages

Customer Value Modeling relies on In this step, you examine where you have
customers’ subjective judgments about price and operational advantages. Which value drivers can
product attribute performances. It assumes that you deliver more efficiently and at lower cost than
customers seek to purchase the products that others? Also, which drivers are constrained by
give them the greatest perceived benefit your resources and operations? Experience,
capital spending plans, personnel capabilities,
VALUE-BASED MARKET SEGMENTATION and overall company strategy are among the
inputs to this step. Those factors contribute to
Market segmentation is one of the most customer profitability, value delivery, and the
important tasks in marketing. Identifying and price you can charge for bundled and unbundled
describing market subgroups in a way that guides offering features. You should also examine
marketing and sales decision-making makes the competitive strengths and weaknesses on key
marketing and pricing process much more drivers as closely as you can. With these data,
efficient and effective. you can cross-reference and compare lists of
Significant differences between value- customer needs served and unserved, the seller’s
based segmentation and other methods are advantages and resource limitations, and
especially critical for pricing. First, most competitors’ abilities.
segmentation criteria correlate poorly with Step 4: Create Primary and Secondary
different buyers’ motivations to pay higher or Segments
lower prices. Second, even needs-based
segmentations give priority only to those
This step combines what you’ve learned so far Price Structure
about how customer values differ and about your Tactics for Pricing Differently Across
costs and constraints in serving different Segments
customers. In theory, your primary segmentation A segmented price structure is one that causes
is based on the most important criterion revenues to vary with differences in the two key
differentiating your customers. Your secondary elements that drive potential profitability: the
segmentation divides primary segments into economic value that customers receive and the
distinct subgroups according to your second most incremental cost to serve them. There are three
important criterion. Your tertiary segmentation mechanisms that one can use to maintain
divides second segments based on the third most such a segmented structure: price-offer
important criterion, and so on. configuration, price metrics, and price fences.
Each is appropriate for addressing different
Step 5: Create Detailed Segment Descriptions reasons for the existence of value-based
segments.
Value-based segmentation variables can look fine
to the price strategist, but segments should be PRICE-OFFER CONFIGURATION
described in everyday business terms so that
sales people and marketing communications When differences in the value of an offer across
planners know what kinds of customers each segments is caused by differences in the value
segment represents. Exhibit 2-12 lists the needs associated with features, services, or both, a
and typical firmographics of the customer- seller can segment the market by configuring
controlled scheduling segment’s three sub- different offers for different segments. Using offer
segments. It also lists specific catalog publishers design to implement segmented pricing requires
within each segment. minimal enforcement of the segments because
customers self-select the offers that determine
Step 6: Develop Segment Metrics and Fences their prices.
This is the next logical step in pricing strategy and To create an effective price structure, one must
management, a step we cover in greater detail in first determine which features and services the
Chapter 3. Here, it’s important to recognize that firm should price à la carte, leaving customers to
segmentation isn’t truly useful until you develop customize their own offers and which features
the metrics of value delivery to market segments and services to bundle into packages. There are
and devise fences that encourage customers to multiple arguments against pricing all individual
accept price policies for their segments. features and services separately. A single price
for a bundle of features and services reduces
Metrics are the basis for tracking the value
transactions costs for both customers and sellers.
customers receive and how they pay for it. For
The costs to make and deliver most products and
example, car rental companies once used a
services increase with the number of variations
distance-based value metric and charged
allowed, although technology is reducing the cost
customers for the mileage traveled, in addition to
of mass customization. Lastly, research has
the time used.
shown that people are less sensitive to the cost of
Fences are those policies, rules, value-added features and services when bundled
programs, and structures that customers must as a single expenditure.
follow to qualify for price discounts or rewards.
Optimizing an Offer Bundle
For example, minimum volume requirements,
time-based membership requirements, bundled By creating more than one bundled option
purchase requirements, and so on keep prices designed to appeal to different segments, a
paid and the value delivered to customers in line. marketer can get most of the benefits described
above along with the financial rewards of
segmentation.
CHAPTER 3
Adding to the benefits of bundling, sellers
MODULE 3 can often earn more profit by pricing a bundle
than they could by pricing the individual elements
when a particular relationship exists among the Unbundling Strategically
features included in the bundle. Bundling is profit
enhancing when it is possible to bundle features While bundling can be a profit-enhancing strategy
and services that create high value for some for segmentation, it often has the opposite effect
significant customer segments but more when variable cost services are bundled simply to
moderate value for another. A simple à la carte differentiate an offering.
price for one feature or service that optimized Unless the cost to deliver a service is trivial
profitability from one segment would necessarily relative to the overall value of the offer, bundling
over or under price other segments. Bundling, optional services “free” will undermine profitability.
however, can facilitate more profitable, value- Unbundling them with per use fees or limiting the
based pricing to each segment. The following use of them, as many airlines are doing for
example illustrates the principle when the same baggage handling or for using an agent to make
features can be priced profitably for more than reservations, is in
one segment, but the most profitable price level
for different segments is not the same.

Designing Segment Specific Bundles fact strategically essential when facing intense
competition. Where customers have come to
Bundling can also facilitate segmented pricing, expect the service to be included, companies can
thus increasing profitability, when different unbundle the price structure without upsetting
customer segments have different price sensitivity
customers by offering rebates for forgoing use.
for a “core” product or service (for example, For example, one company whose customers had
lodging at a popular vacation spot). When it is become accustomed to placing orders on short
possible to find features or services that one notice for “free” raised its prices but, at the same
segment values highly and another does not (for time, offered a discount of more than the price
example, access to a pro-quality golf course or a increase for orders to be shipped within seven
“kids’ club” where children can be left safely and days. That enabled it to avoid disrupting
entertained), it is easy to design segment-specific relationships with customers already paying a
pricing by bundling. premium for its quick service while enabling it to
As rewarding but often overlooked is the potential match competitive prices when necessary.
for bundling value-added features and services to PRICE METRICS
attract customer segments that require a lower
price to win their patronage. Although they pay a Not all differences in value across segments
lower price, their purchase volume may, reflect differences in the features or services
nevertheless, be profitable, especially during off- desired. Value received is sometimes not even
peak periods or economic downturns when related to differences in the quantity of the
excess capacity would otherwise remain unused. product consumed, necessitating a price metric
Simply cutting prices to win their business would, unrelated to quantity of product or service
however, make it difficult to continue charging provide. Price metrics are the units to which the
other customer segments a higher price and price is applied. They define the terms of
could “cheapen” the image of the brand. Bundling exchange—what exactly will the buyer receive per
a “free” or low-cost service or feature specifically unit of price paid.
preferred by this segment, however, can improve
the value proposition for that segment without Creating Good Price Metrics
having to cut the offer price explicitly.
There are five criteria for determining the most
There is an alternative to adding a feature that profitable price metrics for an offering (Exhibit 3-
raises the value of the discounted offer to only the 4). The first criterion for a good price metric is that
low-price segment. That is to add a feature to the it tracks with differences in value across
lower cost offer that kills value for the higher- segments. While offer design facilitates different
priced segment without affecting the value to the pricing differently based upon what people chose
discount segment. to buy, a price metric not based upon units of
purchase can facilitate different pricing for the
same offer. Second, a good metric tracks with designed with proprietary technology to fit
differences in the cost to serve across customer uniquely with the asset and carried a remarkable
segments. A third criterion for a good metric is wholesale margin of 60 percent. The key to HP’s
that it is easy to implement without any ambiguity pricing success is that its pricing allowed it to earn
about what charge the customer has incurred. some profit from its superior printers from the
Profit-sharing or performance-based pricing are many light users who bought them and its high-
theoretically ideal ways to achieve the first two priced ink. But HP could earn much more from
criteria for a good metric—tracking with value and heavy users who need to replace their printer
cost. The fourth criterion for evaluating a price cartridges more frequently. This tie-in strategy
metric is how the metric makes your pricing enables HP’s inkjet division to maintain a 50
appear in comparison with competitors’ pricing, percent market share and profit per dollar sales
and the impact of that on the perceived ratio that is twice that of the company in general.
attractiveness of your offer. The fifth and final In service-based companies, tie-in contracts are
criterion for evaluating a price metric is how the frequently used to reduce the cost for new buyers
metric aligns with how buyers experience the to try their services. Wireless phone providers
value in use of the product or service. The better offer a digital telephone for a nominal fee, and
the alignment—how a price metric fits the timing sometimes free, if the buyer agrees to purchase a
and magnitude of the customers’ expenditure— long-term service contract to use the company’s
the more attractive the offer. wireless network for 12 or 24 months. Satellite
entertainment companies offer households a
Performance-Based Metrics satellite dish and receiver unit for a greatly
reduced price when buyers agree to subscribe to
An ideal price metric would tie what the customer
a higher-priced entertainment package of
pays for a product or service directly to the
channels for a minimum of 12 or 24 months.
economic value received and the incremental
These packages can be particularly effective for
cost to serve. In a few cases, called
low knowledge buyers, who perceive significant
“performance-based” pricing, price structures can
risk in investing in a new and little-known
actually work that way. Also, performance-based
technology—and then developing them into loyal
pricing has the effect of shifting the performance
buyers who become accustomed to the firm’s
risk from the buyer to the seller.
technology and programming.
Tie-Ins as Metrics
PRICE FENCES
A very common challenge for a company that
Sometimes value differs between customer
sells capital goods is that the value of owning
segments even when all the features and
them can vary widely across segments based
measurable benefits are the same. Value can
upon how intensely they are used.
differ between customer segments and uses
“Tie-in” sales like those that tied purchase simply because they involve different “formulas”
of cans contractually to purchase of the machine for converting features and benefits into economic
were quite common until 1949, when the federal values. The difference may be tied to differences
courts decided that such contracts were not in income, in alternatives available, or in
enforceable under U.S. antitrust law because of psychological benefits that are difficult to measure
their impact on the otherwise freely competitive objectively. Unless there is a good “proxy” metric
market for the tied commodity. 5 But although that just happens to correlate with the resulting
contractual tie-ins are no longer enforceable, differences in value, the seller needs to find a
companies still frequently use technological price fence: a means to charge different
design to tie a unique consumable to an asset. customers different price levels for the same
For example, Hewlett-Packard (HP) led the products and services using the same metrics.
industry in the development and manufacture of Price fences are fixed criteria that customers
inkjet printers. HP strategically priced the printer must meet to qualify for a lower price. At theaters,
—the asset—low to make the up-front cost museums, and similar venues, price fences
competitive with much lower-quality printers. The
replacement ink cartridge—the consumable—was
are usually based on age (with discounts for by purchase location. This is common practice for
children under 12 years of age and for seniors) a wide range of products.
but are sometimes also based on educational
status (full-time students get discounts), or A clever segmented pricing tactic common for
possession of a coupon from a local paper pricing bulky industrial products such as steel and
(benefiting “locals” who know more alternatives). coal is freight absorption. Freight absorption is the
All three types of customers have the same agreement by the seller to bear part of the
needs and cost to serve them, but perceive a shipping costs of the product, the amount of
different value from the purchase. Price fences which depends upon the buyer’s location. The
are the least complicated way to charge different purpose is to segment buyers according to the
prices to reflect different levels of value. attractiveness of their alternatives.
Unfortunately, while simple to administer, the Trade barriers between countries once made
obvious price fences sometimes create segmentation by location viable even for products
resentment and are often too easy for customers that were inexpensive to ship. As trade barriers
to get over whenever there is an economic have declined around the world, and especially
incentive to do so. Thus, finding a fence that will within the European Union, the tactic has become
work in your market usually requires some less effective.
creativity.
Time of Purchase Fences
Buyer Identification Fences
When customers in different market segments
Occasionally pricing goods and services at purchase at different times, one can segment
different levels across segments is easy because them for pricing by time of purchase.
customers have obvious characteristics that
sellers can use to identify them. Priority pricing is one example of segmenting by
time of purchase. New products in a retail store
Rarely is identification of customers in different are offered at full price, or sometimes premium
segments straightforward. Yet, management can surcharges over full price in the case of extreme
sometimes structure price discounts that induce excess demand. Over time, as product appeal
the most price-sensitive buyers to volunteer the fades in comparison to newer competitive
information necessary to identify them alternatives, buyers discount the product’s value
Deal proneness is another form of self-induced until they are willing to pay only a fraction of its
buyer identification— especially through the use original price for leftover models.
of coupons and sales promotions, a frequent tool Predictable, periodic sales offering the same
of consumer marketers. Coupons provided by the merchandise at discounted prices can also
seller give deal-prone shoppers a way to identify segment markets. This tactic is most successful in
themselves. markets with a combination of occasional buyers
Often a buyer’s relative price sensitivity does not who are relatively unfamiliar with the market, and
depend on anything immediately observable or on with more regular buyers who know when the
factors a customer freely reveals. It depends sales are and plan their purchases accordingly.
instead on how well informed about alternatives a Time is also a useful fence when demand varies
customer is and on the personal values the significantly with the time of purchase but the
customer places on the differentiating attributes of product or service is not storable.
the seller’s offer. In such cases, the classification
of buyers by segment usually requires an expert Purchase Quantity Fences
salesperson trained in soliciting and evaluating
the information necessary for segmented pricing. When customers in different segments buy
different quantities, one can sometimes segment
Purchase Location Fences them for pricing with quantity discounts.

When customers who perceive different values There are four types of quantity discount tactics:
buy at different locations, they can be segmented volume discounts, order discounts, step
discounts, and two-part prices. All are common
when dealing with differences in price sensitivity,
costs, and competition.

Volume discounts are most common when selling

products to business customers. Also, Volume
discounts are based on the customer’s total
purchases over a month or year rather than on
the amount purchased at any one time. At some
companies, the discount is calculated on the
volume of all purchases; at others, it is calculated
by product or product class. Many companies
give discounts for multiple purchases of a single
model but, in addition, give discounts based on a
buyer’s total expenditure on all products from the
company

Often sellers vary prices by the size of an order

rather than by the size of a customer’s total
purchase volume. Order discounts are the most
common of all quantity discounts. Almost all office
supplies are sold with order discounts. Copier
paper, for example, can be purchased for about
$20 per case of about 10 reams, but purchased
individually it costs several dollars per ream.
Order discounts may be offered in addition to
volume discounts for total purchases in a year,
because volume discounts and order discounts
serve separate purposes. The volume discount is
given to retain the business of large customers.
The order discount is given to encourage
customers to place large orders.

Step discounts differ from volume or order

discounts in that they do not apply to the total
quantity purchased, but only to the purchase
beyond a specified amount. The rationale is to
encourage individual buyers to purchase more of
a product without having to cut the price on
smaller quantities for which they would pay a
higher price. Thus, in contrast to other
segmentation tactics, step discounting may
segment not only different customers, but also
different purchases by the same customers. Such
pricing is common for public utilities, from which
customers buy water and electricity for multiple
uses and place a different value on it for each
use.