1. Price Structure and Segmented Pricing
MK814
Gerald Smith

2. 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

3. 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 %
Service B %
Service C + 12 %
-10%
-15%
Premium
(130% of standard)
Included
A,B,C Included *
Service D + 9%
Service E + 6%
Required
- 15%

4. 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

5. 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?

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

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

13. 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.

14. 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.

15. 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?

16. 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?

17. 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?

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

19. 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

20. 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

21. 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

22. 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 $ 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?

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

24. 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

25. 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