As consumers, we all buy goods and services based on a multitude of factors, including price.

Consciously or subconsciously, we decide that a given price is worth paying for a product or service and the transaction takes place. Most times, we rely on a gut feeling, but there’s a lot going on in our minds behind every decision.

But most of us don’t realise that often we get charged not based on the value or the product or service but based on who we are and what we’re prepared to pay.

The same business may charge others less for the same solution because of their circumstances or attitudes.

This is the price segmentation strategy in action. In this article, you’ll learn why it’s important and how you can develop effective price segmentation in your business depending on the types of customers you serve.

What Is Price Segmentation?

Price segmentation is part of brand strategy. It’s a strategy used by brands to charge different prices to different market segments for the same or similar products or services.

Although the solution of a brand has the potential to serve many market segments, often, the pricing of those solutions disregards some of those market segments.

This means that because of their rigid pricing strategy, they’re leaving money on the table and hindering their growth opportunity.

Advantages

Advantages

Some of the most valuable price segmentation advantages include:

Increase revenue and profit

Increased reach and market share

Flexibility for differentiated marketing

Broader appeal and growth potential

Disadvantages

The price segmentation strategy is not without risks. Some of the major disadvantages include:

Avoidance and dilution:
Where the customer identifies the strategy and finds ways to work around it.

Inequality & Distrust:
When the customer becomes aware that some market segments have paid less for the same solution, they may feel deceived leading to loss of trust and customer base.

Internal Confusion:
Any price segmentation strategy should be developed on the clarity of the market segment and the processes for pricing.

Bundle Pricing:

This strategy allows brands to identify market segments and adjust their offering and price to appeal to each segment.

For example, an “essential” bundle would enable a business to remove unnecessary items from their offering to reduce the price, while a first class offer adds attractive extras to increase the price. That way, if the business’s needs change over time, there’s a smaller risk of stagnation as they can simply choose a package that better adapts to their needs.

Similarly, sometimes companies offer a special bundle price available only at the time of purchase to encourage consumers to buy more at once. This is particularly useful for one-time purchases where the business won’t receive recurring revenue. The sales team often brings this up right before it’s time to pay, like at any fast food restaurant when the cashier offers a dessert.

In this circumstance, the core offer (and bulk value) doesn’t usually change.

Value-Based Pricing:

With this type of price segmentation, the price changes based on the value of the product or service to the customer.

This is commonly found in creative services.

Where the value of the work provided is higher to larger businesses with more customers, reach, and revenue than a smaller business, the price of the work is charged at a higher rate. You can implement this strategy by separating your potential customers into groups — based on factors like company size, annual revenue, or industry.

Channel Pricing:

Products or service may be priced differently depending on the channel used.  

Processing a sale through an in-store experience would come at a higher cost to the business because of rent and staff, so online or e-com prices might come at a lower price.

Location Pricing:

This strategy is most commonly used in the entertainment industry.

If you want to take your partner to the theatre for a night out, you’ll be charged more, the closer you are to the stage. Location based pricing can also be bundled in with other, more exclusive offers to round out a V.I.P experience.

Time Period Pricing:

AirBnB hosts often charge more for the same property at busier times of the year. 

For example, a booking in the middle of October may be significantly cheaper than a booking in the peak of summer.

Purchase Time Pricing:

The fashion industry places a high value on seasonal wear.

A new spring outfit will cost significantly more on release than it will when the season is finished. Often, the following spring will bring new trends. Therefore they’re incentivised to offload stock at reduced rates.

Volume Pricing: 

This pricing strategy is very common, and entire markets have been built on it.

Ultimately, the larger the volume of an order, the lower the cost per unit. Of course we see this every day in the supermarket where one time of Heinz baked beans will seem like less value compared to the savings made for a 3-pack.

You also see this with SaaS (Software as a service) brands offering a lower price per month when paid annually.

Condition Pricing:

This is a pricing strategy used by brands to reduce risk. Essentially they use conditions to reduce risk allowing them to lower the price.

For example, Southwest Airlines might offer discounted flights under the condition that they’re non-refundable.

Agencies might also include limited revisions for a set price or unlimited revisions for a higher price.

Step 1: Segment Your Market

Analyse the overall market to understand the groups of people who would want or need your product or service.

This broad market should then be further segmented. This can be through their resources, their attitudes, their behaviours or a combination of these elements.

For example, a creative services agency may have segments that look like this

Solution Focused Funded Businesses

Survival Focused Bootstrapped Start Ups

These two customer segments represent different businesses with different circumstances and different budgets.

Step 2: Detail Your Segments

Once you’ve identified the segments of the market you want to target, you want to drill beyond the surface to get to know them.

Their demographics and psychographics will give you a window into their circumstances and behaviours, but you want to dig deeper to understand what makes them tick.

When you know what they want to achieve, why they want to achieve it and the obstacles standing in their way, you’re much better placed to create an offer that bridges the gap.

Step 3: Define Your Offers

With such a detailed understanding of your market segments, you’re ready to define your offers.

Ultimately, the solution you offer won’t change too much, so the messaging should speak to the same outcome.

The difference, however, will be in identifying the segment and matching the offer.

A creative services agency will likely have a core service offering to provide their clients with certain deliverables from a brand identity to a website.

In segmenting the market, they’re not changing their core service offering, they’re simply adjusting the offer to fit the needs of their clients.

For a survival-focused bootstrapped startup, the agency may strip away some non-essentials such as a style guide, e-commerce, copywriting, supporting graphics, etc…

For the solution-focused funded business, they might add strategy, face-to-face workshops, photography, follow-up consultations, and more.

In both cases, they’re still providing the core service, they’re simply adjusting the offer around it.