Transcript ch.6 - Surej P John

How Customer Differences Can Lead to
Price Differences
Price Segmentation
Chapter 6
Agenda
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What is price segmentation?
When does price segmentation work?
Is price segmentation a good or bad?
How do segmentation hedges enable a
firm to price-segment the market?
• How should an executive design a price
segmentation policy?
Price Segmentation
• Pricing the same or similar products
differently for different customer segments.
• Different customers value products differently
• This diversity is a form of market
heterogeneity.
• When we are describing differences between
individuals in their willingness to pay, we are
describing a form of heterogeneity in
demand.
Goal of Price Segmentation
• Align prices to demand heterogeneity in an effort
to extract a greater portion of the consumer
surplus from the market in the form of profits.
• Align prices to factors that drive (or undermine)
value for customers can be used to create a price
segmentation policy in that the firm automatically
charges more (or less) when and where the
product delivers more (or less) utility.
• Align prices to cost factors to discourage profitdestructive behaviors.
Results of Price Segmentation
It can improve the
firm’s profits.
Price
Demand
Profit
Contribution
P*
Revenue
Variable
Costs
Q*
Demand
PH
Price
It can improve the
number of customers
served by actually
lowering the market
entry price for some
customers.
Quantity
Profit
Contributions
PL
Variable
Costs
QH
QL
Quantity
Segmentation Hedges
• Segment hedges are barriers that prevent
customers who are willing to pay a higher
price from paying a lower price
• If the segmentation hedge acts as a sieve
rather than a barrier, it can actually
damage profits
Segmentation Hedges
• The key to price segmentation is the ability to separate
customers who are willing to pay more from those who are
not.
• If the segmentation hedge is perfect, all the customers who
are willing to pay more will purchase at the higher price,
whereas any customer willing to pay lower price are
allowed to purchase at the lower price.
• If the segmentation hedge is imperfect, no products would
be sold at the higher price
• In other words, with poor segmentation hedges, all
customers, both with a high willingness to pay and a low
willingness to pay, will purchase at the lowest price.
Limited Transferability
• Price Segmentation
requires limited
transferability of the
product or service
• Once sold to a customer,
that customer should find
it difficult to resell it to
another customer.
Segmentation classifications
• First, Second and Third degree price
discrimination
• Complete, Direct and Indirect Price
segmentation
• Strategic or tactical price segmentation
1st, 2nd,& 3rd Degree
Price Discrimination
• Perfect price discrimination, or first-degree
price discrimination, is charging every
customer at the price that matches their
willingness to pay.
• Second-degree price discrimination is
charging different customers different prices
according to the quantity purchased.
• Third-degree price discrimination is charging
different markets or market segments
different prices.
Complete, Direct, and Indirect Price
Segmentation
• Complete price discrimination requires
complete information of all customers’
willingness to pay in all situations.
• Direct segmentation defines price variances
based upon specific attributes of the
customer, such as age, gender, or location
• Indirect segmentation defines price variances
based upon a proxy that correlates to
customer’s willingness to pay
Strategic or Tactical
• Tactical price segmentation approaches
are those that are used to capture
marginal and sometimes even specific
customers in unique situations
• Strategic price segmentation approaches
are those in which the definition of the
price structure itself enables different
customers to pay different price
Segmentation Hedges
• Segment hedges are barriers that prevent
customers who are willing to pay a higher price
from paying a lower price
• If the segmentation hedge acts as a sieve rather
than a barrier, it can actually damage profits
• Requirements
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Correlate with customers’ perception of value
Minimal information needed for implementation,
Enforceability,
Cultural acceptability.
Common price
segmentation hedges
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Age
Gender
Income
Time of purchase
Purchase location
Buyer self identification
Quantity of purchase
Negotiation
Summary
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Price segmentation is charging different prices to different customers or
groups of customers.
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Willingness to pay varies between individual customers. This heterogeneity
in willingness to pay creates the opportunity for firms to improve profitability
through price segmentation. In addition to heterogeneity in willingness to
pay, price segmentation strategies require that products sold to one
segment of the market have limited transferability to another segment in the
market. Price segmentation improves profits by enabling the firm to capture
a higher price from those customers who value the product higher and
capture higher volumes at a lower price to customers with a lower
willingness to pay.
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Segmentation hedges are used to separate customers who must pay more
from those who will pay less. Good price segmentation hedges should be
highly correlated with customers’ perception of value, require minimal
information from customers, be enforceable based on objective criteria, and
be culturally acceptable.