Price Segmentation

Outside of work, when people learn what I do for a living, I tend to get one of two responses. Most likely, people nod politely while looking for exits. Or, they tell me “we sell widgets, and I know we’re not pricing it right, but we don’t know how. What do you think the right price is?” Then we have a fun conversation that is sure to leave everyone else looking of the exits.

Part of the challenge is that it’s next to impossible to have a single “right price.” Assuming you can plot a demand curve, you can select a price point to maximize revenue or profit.
Now we’ve got two problems, though. We’re leaving money on the table at the high end, and we’re still pricing ourselves out of the market at the low end. So it makes sense to segment our customers by what they value, and target different versions of the offering and different price points to those segments.
Now we can cover much more of the area under the demand curve. Examples of this type of segmentation range across industries. In the supermarket, you can find basic, value, and premium offerings, or even segmented offerings of the same product in different packaging combinations. B2B offerings often have a similar “good, better, best” segmentation, which works for services as well as physical goods. For more examples, look at this excellent post on the Branding Strategy Insider blog.

One more parting thought. As the market evolves, competitive advantages erode, forcing companies to offer more value and/or charge lower prices. The company that can push the value envelope the furthest can capture a disproportionate share of profits, charging higher prices and garnering more demand.

The trick to doing this effectively is figuring out which sub-segment of the market values your offering, not trying to provide a generic solution to a broader market. (That can be an effective strategy for large players with good distribution, good economies of scale, and the financial imperative to pursue only large markets.)