Segmented pricing

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Segmented pricing
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Segmented pricing is a pricing strategy in which a company charges different customers different prices for the same product or service. This can be done either by offering different levels of service or by targeting different customer segments. It is often used to maximize profits or to attract a wider variety of customers. Companies may also use it to differentiate their products in the market.

Segmented pricing is a situation, when seller or a company establishes different prices (two or more), for one the same product. Even if product have various costs, it do not have influence for different prices determined by enterprises[1]. Segmented pricing is also called price discrimination” [2]. Segmented pricing, is more productive if it exist segmentation on the market, or perceived value of product in each segment, is comparable with prices set for them, or segments have "different degree of demand" [3]. Also, when customers buy some product or use some service very rarely, segmented pricing is a well-chosen strategy[4]. Segmented pricing, can be implement by coupons. Customers who not pay attention to the price, will not use the coupons, therefore they pay more for product. However clients, who put an effort, and use a coupon, are more sensitivity for a price[5].

Example of segmented pricing

An example of segmented pricing can be seen in the airline industry. Airlines often use segmented pricing to maximize profits and attract different customer segments. For example, an airline may offer discounted fares to students, seniors, and military personnel. They may also offer higher fares for business travelers and those who need to travel on short notice.

Segmented pricing can also be seen in the hotel industry. Hotels often offer different prices for different room types, such as standard, deluxe, and suite. They may also offer discounts for customers who stay multiple nights, or for loyalty members.

Finally, segmented pricing can be seen in the retail industry. Retailers often offer different prices for different products, such as different sizes or colors. They may also offer discounts for bulk purchases or special promotional pricing.

Forms of segmented pricing

Types of segmented pricing.png

Segmented pricing have four different forms[6]:

  • Customer-segment pricing is a pricing strategy in which a company charges different prices to different customer segments, based on their perceived value or ability to pay. For example, a company may offer discounted prices for students or seniors, or may offer a higher price for luxury customers.
  • Product-form pricing is a pricing strategy in which different versions of a product, such as different sizes or colors, are priced differently. For example, a clothing store may offer a basic t-shirt for $10, and a premium version of the same t-shirt for $20.
  • Location pricing is a pricing strategy in which different prices are charged for the same product based on its location. For example, a business may charge higher prices for products sold in high-end locations, or may offer discounted prices for products sold in remote locations.
  • Time pricing is a pricing strategy in which prices are adjusted based on the time of day, day of the week, or other factors. For example, a restaurant may offer discounted prices for meals during off-peak hours, or may offer different prices for products depending on the season.

In reference to customer-segment pricing, marketing distinguishes several types of segmentation[7]:

  • Demographic segmentation (age, gender, family size)
  • Geographical segmentation (region, population destinity)
  • Psychological segmentation (social class, personality characteristic)
  • Behavioural segmentation

Advantages of segment pricing

  • Increased Profits: Segmented pricing allows companies to tailor their pricing to different customer segments in order to maximize profits. By offering lower prices to certain customer segments, companies can increase their sales and revenue.
  • Increased Revenue: By offering different prices to different customer segments, companies can increase their overall revenue. This allows companies to generate more income from the same product or service.
  • Attracts Customers: Segmented pricing allows companies to target specific customer segments and offer them customized pricing. This helps attract new customers, as well as retain existing customers.
  • More Flexibility: Segmented pricing offers more flexibility than traditional pricing methods. Companies can quickly and easily adjust their prices to meet the changing needs of their customer segments.
  • Differentiated Products: By offering different prices to different customer segments, companies can differentiate their products in the market. This helps companies stand out from their competitors and can help attract new customers.

Limitations of segment pricing

  • Price Discrimination: Segmented pricing may lead to price discrimination, where customers in different segments are charged different prices for the same product or service. This may be viewed as unfair and can lead to customer backlash.
  • Complicated Pricing Structure: Segmented pricing requires companies to keep track of different pricing tiers and customer segments, which can be complicated and time-consuming.
  • Increased Competition: Segmented pricing can lead to increased competition in the market, as customers may shop around for the best deal. This can lead to lower profits and reduced market share.
  • Higher Costs: Segmented pricing requires companies to invest more resources in developing and managing a complex pricing structure. This can result in higher costs and lower profits.
  • Unethical Practices: Segmented pricing can be used for unethical practices such as price discrimination or predatory pricing. Companies should be aware of the potential risks and ensure that their pricing practices are ethical.

Product-mix pricing strategies

Segmented pricing is one of several different pricing strategies[8]. Others are:

  • Discount and allowance pricing is a pricing strategy in which a company offers discounts or allowances on certain products or services. This type of pricing is typically used to reduce the cost of a product for customers or to increase sales. Companies offer discounts for bulk purchases, early payment, or other reasons.
  • Psychological pricing is a pricing strategy that takes into account the psychology of consumers. This strategy is used to influence the behavior of consumers by using pricing tactics that are in line with their expectations. These tactics include odd pricing, where a product is priced at a certain amount to make it appear more appealing, and anchoring, where a higher priced product is used to influence the perceived value of a lower priced item.
  • Dynamic pricing is a pricing strategy in which the price of a product or service is regularly adjusted based on market conditions and customer demand. This type of pricing is often used in the travel, hospitality, and online retail industries.
  • International pricing is a pricing strategy that takes into account the differences in local markets, currencies, and customer preferences when setting prices. Companies must consider the cost of goods and services, local taxes and tariffs, exchange rates, and other factors when setting international prices.

Dynamic pricing strategy, is similar with segmented pricing, because different prices depends on different customers segments. Usually, it is based on price negotiation, when enterprise talk with individual customers (from one segment) and negotiate special individual prices. Segmented pricing may be classified as one of dynamic pricing type, because the price is variable and customer segmentation have influence for this process. In general price negotiation is initiated by client, and segmented strategy is initiated by the seller. However, depending on the literature, segmented pricing can be single pricing strategy, or it can be classified as one of dynamic pricing strategy type[9].

References

  1. Kotler P., Armstrong G., Wong V., Saunders J.,(2008), p.664
  2. Vogel M., Papathanassis A., Wolber B., (2012), p. 134
  3. Frost R. D., Fox A., Strauss J., (2018), p. Chapter 10
  4. Nagle T. T., Muller G., (2017), p. Chapter - Challenges that can Undermine Segmented Pricing
  5. Stiving M., (2011), p. 94
  6. Kotler P., Armstrong G., Wong V., Saunders J.,(2008), p.664-665
  7. Gbadamosi A., (2013), p. 146-149
  8. Kotler P., Armstrong G., Wong V., Saunders J.,(2008), p. 663-669
  9. Frost R. D., Fox A., Strauss J., (2018), p. Chapter 10 (Pricing Strategies)

Footnotes

Author: Kinga Dudek