Price Structure and Segmented Pricing MK814 Gerald Smith

The Pricing Strategy Pyramid Price Level Price setting Pricing Policy Negotiation Tactics & Pricing Setting Procedures Value Communication Communication, Value Selling Tools Price Structure Metrics, Fences Value Creation Economic Value, Offering Design, Segmentation

Pricing Menus Map Price Structure, Help Customers Trade Up or Trade Down A “Fixed Price, Flexible Offer” Menu Offerings Available Fast Turn-around Special Processing Long-term Contract Unbundled Service Economy (85% of standard) +25% Not Available Not Available Base Offer Standard +15% Service A + 3% Service B + 7% Service C + 12 % -10% -15% Premium (130% of standard) Included A,B,C Included * Service D + 9% Service E + 6% Required - 15%

Examples of Price Sensitivity Which segments are more price sensitive? Personal vs. Business Travelers New to Market vs. Experienced Buyers Light Users vs. Heavy Users Students/Retired vs. Employed

Steinway’s Historic Segmented Pricing Steinway, a tiny but well regarded New York piano maker in the 1850's grew quickly after Doretta Steinway, the founder's daughter, got the idea of offering free piano lessons with the sale of each piano Can you explain this as a segmented pricing tactic? What are the segments and why would their price sensitivities be different?

Examples of Cost To Serve Which segments are more costly to serve? Peak vs. Off-Peak Purchasers New Customers vs. Established Customers Light Users vs. Heavy Users

Non-Segmented Price-Offerings Missed Opportunities High Unharvested value p1 One size fits all offering Value Received Med Missed Opportunities A B C D Low Segments During the recession, the trend was to bundle value-added services into core offering to defend price points and close deals

Tiered Offerings Map to Value to Improve Profitability Prod. 4 High Prod. 3 Value Prod. 2 Prod. 1 A B C D Low Segments Differences in value can be captured with product variations or service augmentation that creates natural fences between segments

Other Examples of Product Variations Standard SRP $219.99 Professional SRP $299.99 All in Standard + MS Access Developer SRP $529.99 Development Tools to Build Own Applications Basic SRP $199.95 Pro SRP $279.95 All in Basic + Create Customized forms, Tools to Track add’l items Premier SRP $399.99 All in Pro + Daily Sales Summary, Retail Specific Reports

Sometimes the Offering Can’t be Unbundled… … in these instances, look to pricing metrics to capture value differences High One size fits all offering - p4 - - p3 - Value Received Med - p2 - - p1 - A B C D Low Segments

Examples of Value-based Pricing Metrics Market Traditional Metrics Value-based Metrics Real Estate Want Ads $ / column inch $ / property value Aircraft Engines $ / engine $ per hour of use Information service $ / minute $ / download

Segmented Pricing Fences: Tactics For Separating Markets Buyer Identification Time of Purchase Purchase Location Volume or Purchase Quantity Product Bundling Tie-Ins Metering

Segmenting By Buyer Identification Charging different prices to different buyers based on observable characteristics that signal buyers' price sensitivity. Buyers in different segments must have different characteristics that either are obvious, or that buyers can be induced to reveal.

Segmenting By Time Of Purchase Charging higher prices at times when less price sensitive buyers naturally purchase, and charge lower prices at times when it would be inconvenient for them to purchase. There must be a natural difference in time-of-purchase patterns for different segments of buyers.

The Well-Structured Department Store A department store has an interesting discounting policy for brand-name quality clothing The ticket on each item is dated and lists a number of prices. The first price is the one that a customer pays if the merchandise is bought within the first eleven days after arrival. The next price is discounted an additional 25% and applies to merchandise that is 12 to 17 days old. The third price is discounted 50% and applies to merchandise 18 to 23 days old. The fourth price is discounted 75% and applies to merchandise that is 24 to 29 days old. On the 30th day, the merchandise is turned over to charity. Since most of the merchandise is surplus, there is generally a limited supply in each style, color, and size. What does this strategy accomplish? Describe the customers whom you suspect make up the different retail segments. A number of stores in other cities adopted this strategy for surplus merchandise, but no store had adopted it for new merchandise. Can you suggest why? For what other types of products would you consider this a profitable pricing tactic?

Peak Load Pricing: Segmenting By Time Of Purchase Peak-load pricing is used to segment markets by the cost of serving them at different times? Name types of businesses, other than public utilities, that could effectively use peak-load pricing. Describe how a peak-load strategy might be implemented in each case. Yield management represents a more sophisticated version of peak-load pricing. What kinds of companies use yield management?

Smart Steak House A fancy steak house in a shopping mall offers a 20% discount to employees of other stores in the mall, provided that they eat before 6:00 PM or after 8:00 PM Can you explain the rationale for this strategy?

Delicious Deli A deli in a college town has an interesting pricing strategy for students. The dinner specials at the restaurant are normally $4.95. Students, however, can buy weekly "meal tickets" that give them three meals for $13.90, 5 meals for $22.25, or seven meals for $29.90. The tickets expire at the end of each week and they are not transferable Can you explain this pricing strategy?

Segmenting By Purchase Location Charge higher prices at places where less price sensitive buyers purchase Price sensitive and price-insensitive buyers naturally purchase at different locations or… Insensitive buyers will not change purchase location to take advantage of the price difference

Segmenting By Volume Or Purchase Quantity When price segments differ in the quantities they buy, charge different prices for different quantities If buyers are in competition, must be cost-justified

Segmenting By Product Bundling Selling different products either as an indivisible bundle, or only at higher prices if separated Buyers must differ in their relative valuations of the bundled goods

Two Examples Salido’s Salad and Sandwich Shop The local outlet of a fast food chain charges $2.60 for a salad from its salad bar if ordered a la carte. When ordered with a sandwich, however, the salad bar costs only $1.99. In either case, the customers are permitted to fill their bowls just once Can you explain this segmented pricing technique? Hotel Service Policies Most hotels will lend guests an iron and an ironing board free of charge, despite the fact that this service competes with the hotel's valet service, for which it does charge. Those same hotels usually charge outrageously to supply glasses, ice, and mixers for those who wish to have alcoholic drinks in their rooms. Can you explain this anomaly?

Bundling for Automobile Sports Package Racing Stripes and Hubcaps Right Mirror Heavy Suspension Racing Enthusiast $200 $150 Segment Outdoor Enthusiast $100 $300

Segmenting By Tie-ins An explicit or implicit requirement that buyers of an asset purchase consumables used with the asset only from the seller Buyer's value of the asset is proportional to use intensity

Segmenting By Metering Rental or lease arrangements with a variable rental fee dependent upon a metered usage rate Buyers' value of the asset is proportional to use intensity