PRICE

SEGMENTATION
MARK CHRISTIAN CO, MBA
PRICE SEGMENTATION
Price segmentation is when a company charges
different prices to different groups of customers
based on their willingness to pay. The goal is to
make more money by charging higher prices to
customers who are willing to pay more, while still
selling to customers who will only pay less.
SEGMENTATION HEDGE
The *segmentation hedge* is a method or
mechanism the company uses to separate
these groups and ensure that people who
are willing to pay more don’t end up getting
the lower price. For example, it could be
based on factors like customer type, time of
purchase, or location.
In the context of price segmentation,
the term **"hedge"** refers to a
**barrier or mechanism** that helps
separate different groups of
customers and ensures that each
group pays the appropriate price
based on their willingness to pay.

The idea is that the "hedge" acts as a

tool or strategy to prevent customers
who should pay a higher price from
accessing the lower price, and vice
versa.
In a broader sense, outside of pricing,
a **hedge** can also refer to an action
taken to reduce risk or protect against
uncertainty.

For example, a **financial hedge**

might involve taking steps to protect
against the risk of fluctuating prices in
the market, like using insurance or
contracts to minimize losses.
But in **price segmentation**, a
**hedge** specifically helps to
segment customers and control how
they are charged based on factors like
their behavior, location, or
preferences, ensuring that the
company can maximize its profits
while minimizing the chance of
customers "cheating" the pricing
system.
A *perfect segmentation hedge*
would make sure that:

- Customers willing to pay a higher

price are charged that price, and

- Customers willing to pay less are

charged the lower price, without
anyone slipping into the wrong group.
However, segmentation hedges are rarely
perfect. If they are too weak or ineffective,
customers who are willing to pay more
might end up paying less. This could lower
overall profits because:

- The company might sell more products at

the lower price than it would at the higher
price, and

- The lower price might be worse for profit

than a single, higher price for all customers.
The real challenge in price
segmentation is figuring out how
to set up the hedge — the method
to divide customers fairly and
ensure that those who should pay
more actually do.
TYPES OF PRICE
SEGMENTATION
Price segmentation has been around for a long
time, but formal studies of it started about 100
years ago. Since then, economists and businesses
have tried to classify and categorize the different
ways companies can charge different prices to
different customers.
1ST 2ND 3RD
DEGREE DEGREE DEGREE
1First-degree price Second-degree price Third-degree price
segmentation (or segmentation (or product segmentation (or group
personalized pricing): versioning): This involves pricing): In this approach,
This is when a company offering different versions of customers are divided into
charges each customer the the same product at different groups based on certain
maximum price they're price points. For example, a characteristics (like age,
willing to pay. It’s like company might offer a basic location, or time of purchase)
negotiating a different version of a product at a lower and charged different prices
price for each individual price, and a premium version based on those characteristics.
customer, based on their with more features at a higher For example, students or senior
specific willingness to pay. price. The goal is to let citizens might get discounts, or
This is often used in high- customers choose based on prices might vary based on
end sales or auctions. how much they’re willing to when or where the product is
pay. bought
1ST DEGREE
(PERSONALIZED PRICING)
- Example: Car Negotiation
- When you buy a car, the dealership might negotiate
the price with you based on what they think you're willing
to pay. Each customer is offered a different price
depending on factors like their budget, negotiating skill, or
even their perceived interest in the car. The goal is to
charge the maximum price each person is willing to pay,
which could vary widely from one customer to another.
2ND DEGREE
(PRODUCT VERSIONING)
- Example: Software Versions
- A company like Microsoft offers different versions of
its software, such as Office Standard and Office
Professional. The basic version costs less, while the
premium version with more features (e.g., advanced tools
or extra applications) is priced higher. Customers can
choose which version they want based on their needs
and willingness to pay. Another example is airlines
offering basic economy, economy, and business class
seats—each with different amenities and prices.
3RD DEGREE
(GROUP PRICING)
3. Third-degree price segmentation (Group Pricing)
- Example: Student and Senior Discounts
- Movie theaters often offer lower ticket prices for
students and seniors compared to regular adult prices.
This is an example of third-degree price segmentation,
where customers are grouped based on characteristics
like age, and different prices are charged based on that
group. Another example is regional pricing where
products might be priced differently in different countries
or cities, depending on local market conditions and
customer demographics.
COMPLETE, DIRECT, AND INDIRECT
PRICE SEGMENTATION

Complete Price
Segmentation (Or Direct Price Indirect Price
Perfect Price Segmentation Segmentation
Discrimination)
 1. COMPLETE PRICE SEGMENTATION
(PERFECT PRICE DISCRIMINATION)
- What it is: Each customer is charged exactly what they’re willing to pay,
meaning the price is perfectly tailored to their willingness to pay.
- Example: Think of an auction where each person bids the highest amount
they’re willing to pay for an item. The price they pay is their personal
maximum.
- Challenge: To do this, the company would need to know *exactly* how
much each customer is willing to pay, which can be very difficult and
expensive to figure out.
2. DIRECT PRICE SEGMENTATION
- What it is: Prices are varied based on easily identifiable characteristics of
the customer, like age, location, or membership status.
- Example:
- A movie theater offers discounts for students and seniors.
- A public library might offer free or discounted services to residents of a
certain city.
- Why it’s used: It’s simple to apply, and it targets specific groups based on
known traits. It’s common in both nonprofit and for-profit businesses.
3. INDIRECT PRICE SEGMENTATION

- What it is: Prices vary based on a proxy or indicator (something that is

indirectly linked to customers' willingness to pay). This method encourages
customers who are more price-sensitive to choose lower prices, while
higher-paying customers avoid these options.
3. INDIRECT PRICE SEGMENTATION
- Example:
- A company might offer discount coupons or bulk purchase discounts. The
coupons attract price-sensitive customers who are willing to shop around
for deals, while customers who don’t care as much about price will pay the
full price.
- Package sizes: A company could offer smaller packages at a higher price
per unit (targeting those who are willing to pay more) and larger packages at
a lower price per unit (appealing to price-sensitive customers).
SUMMARY:

- Complete: Custom pricing for each person (perfect but hard to achieve).
- Direct: Clear customer attributes (like age or location) determine price.
- Indirect: Use of things like coupons or package sizes to encourage price-
sensitive customers to pick lower prices
PRICE SEGMENTATION
APPROACHES

Price segmentation can also

be divided into strategic and
tactical approaches,
depending on whether the
pricing decision is a long-term,
planned strategy or a short-
term, situational decision.
 1. TACTICAL PRICE SEGMENTATION
- Coupons: A company offers a limited-time coupon to
- What it is: These are short- encourage customers to buy now.
term, situational pricing - Price promotions: Temporary sales or discounts to boost
decisions made to capture sales in the short term.
specific customers or react to - Rebates: Offering a partial refund after purchase, usually as
certain market conditions. a time-sensitive offer.
Tactical segmentation is often - In business markets, this could include volume discounts
about taking advantage of (offering a price break for buying in bulk) or meet-the-
immediate opportunities. competition pricing (lowering prices to match or beat a
competitor’s price).
Examples: - Key Idea: These decisions are made in response to
immediate needs and are flexible, changing based on the
situation.
2. STRATEGIC PRICE SEGMENTATION
- What it is: These are long-term pricing strategies where the structure of the pricing model
itself creates different price points for different customers. Strategic segmentation is built
into the business model and is meant to align with broader goals.

Examples:

- Multipart tariffs: Charging different rates for different parts of a service (like phone bills
where you pay for calls, texts, and data separately).
- Complement and add-on pricing: Charging a base price for a product and additional charges
for accessories or related products (e.g., buying a printer and then paying extra for ink).
- Versioning: Offering different versions of a product at different price points (e.g., basic vs.
premium software versions).
2. STRATEGIC PRICE SEGMENTATION
Examples (Cont.):

- Bundling: Selling multiple products or services together at a single price (e.g., cable TV
packages or software bundles).
- Subscriptions: Charging customers a recurring fee for access to a service (e.g., Netflix or
Spotify).
- Yield pricing: Adjusting prices based on demand, such as raising prices during peak times (e.g.,
airline tickets or hotel rooms).
- Unit pricing: Charging more to customers who consume more, like utility companies charging
higher rates for higher usage.
SUMMARY:
- Tactical segmentation: Short-term, situation-based pricing strategies (like
promotions or discounts).
- Strategic segmentation: Long-term, built-in pricing strategies that offer
different prices based on customer needs or usage patterns (like
subscriptions, bundling, or multipart pricing).
DESIGNING PRICE
SEGMENTATION HEDGES

Designing segmentation hedges is about creating barriers

that prevent customers who are willing to pay more from
accessing lower prices. The goal is to ensure that customers
are charged according to how much they are willing to pay,
without allowing those who should pay more to cheat the
system. Here’s a simplified breakdown of the key
requirements for designing effective segmentation hedges:
1. CORRELATION WITH WILLINGNESS TO PAY

- The segmentation hedge needs to be closely related to what customers

are willing to pay. If the way you group customers (like age, location, or
behavior) doesn’t match their willingness to pay, your pricing strategy will be
less effective.
- Example: Offering discounts to students is effective because students
typically have lower budgets and are more price-sensitive.
2. MINIMAL INFORMATION GATHERING

- The hedge should require little effort to identify which customers should
pay what price. You don’t want to need too much personal information from
customers at the point of purchase.
- Example: A loyalty program can serve as an effective segmentation
hedge, where frequent buyers get discounts without having to provide
detailed information at checkout.
3. ENFORCEABILITY

- The segmentation hedge must be easy to enforce, with clear, objective

rules for when to grant price discounts. This helps prevent abuse and
ensures fair implementation.
- Example: A senior discount can be clearly enforced by requiring a
customer to show proof of age, preventing someone who isn’t a senior from
using the discount.
4. CULTURAL ACCEPTABILITY

- The segmentation hedge needs to be accepted by customers and society.

If a pricing policy seems unfair, discriminatory, or unethical, it could damage
the company’s reputation.
- Example: Offering different prices based on time of day (like peak pricing
in hotels or airlines) is generally accepted, but a company charging
customers more based on gender could be seen as discriminatory and
harmful to its brand.
SUMMARY:
Effective segmentation hedges ensure that customers pay based on what
they can afford or are willing to pay, while also being easy to manage and
culturally acceptable. To make a hedge work:

- It should be well-connected to customers' willingness to pay,

- Gather minimal personal data,
- Be enforceable with clear rules,
- And be acceptable to customers and society.
USES OF PRICE
SEGMENTATION

Price segmentation is used everywhere because it helps

companies make more money by charging different
customers different prices based on what they’re willing to
pay. Here are some common price segmentation hedges,
which are ways companies create barriers to separate
customers into different pricing groups:
1. COUPONS AND DISCOUNTS

- What it is: Offering discounts to certain customers, like giving coupons to

people who are more price-sensitive (students, seniors, or bargain hunters).

- Example: A grocery store might offer coupons that give discounts to

certain customers, or offer student discounts for things like software or
public transportation.
2. TIME-BASED PRICING

- What it is: Charging different prices depending on when the product or

service is purchased. This helps businesses capture customers at different
willingness-to-pay levels based on timing.

- Example: Airlines often have higher prices for flights during peak travel
times (like holidays) and lower prices for off-peak times (like mid-week days).
3. GEOGRAPHIC SEGMENTATION

- What it is: Charging different prices based on location. This can be due to
differences in local demand, income levels, or competition.

- Example: A coffee shop might charge more for a cup of coffee in an

expensive neighborhood and less in a lower-income area.
4. VOLUME DISCOUNTS

- What it is: Offering lower prices to customers who buy in bulk or higher
quantities. This targets customers who are willing to pay less per unit if they
buy more.

- Example: Wholesale suppliers often give volume discounts to businesses

that buy large quantities of products.
5. PRODUCT BUNDLING

- What it is: Selling several products together at a combined price, often at a

discount compared to buying them separately. This encourages customers
to spend more, but still appeals to those looking for a good deal.

- Example: A cell phone company might offer a bundle where customers

get a phone, accessories, and a service plan for one lower price than buying
each separately.
6. VERSIONING

- What it is: Offering different versions of the same product at different

price points based on features or quality. This allows customers to choose
based on their willingness to pay.

- Example: A software company might offer a basic version of its product at

a low price, and a premium version with more features for a higher price.
7. MEMBERSHIP OR SUBSCRIPTION PRICING

- What it is: Charging a regular fee for ongoing access to products or

services. This provides a steady stream of income for the company while
offering customers a price advantage if they commit for a longer period.

- Example: Netflix or Spotify offer monthly subscriptions that provide

access to content at a fixed rate.
SUMMARY:
Price segmentation is all about charging different prices to different
customers based on things like when they buy, where they are, how much
they buy, or what version of a product they want. Common hedges include
coupons, volume discounts, bundles, geographic pricing, and subscription
models. These strategies help businesses improve profits by capturing
customers at different price points based on their needs and behavior.
ACTIVITY:
1. What is Price Segmentation and why is it significant?
2. Why some companies opt to charge different prices to different types of
customers?
3. Why create segmentation hedges? What is its significance?
THANK YOU