MKT558:PRICING STRATEGIES

ProfessorBaojunJiang

Segmentationandpricediscrimination
Rationaleforpricediscrimination(segmentedpricing)
Pricemetricsandpricefences
Typesandmethodsofpricediscrimination

REASON FOR SEGMENTED PRICING

2

leaves money on the table for these

customers and communicates that
value does not have to be paid for

High

WTP

1 Setting price here

D
Low

Segment Size

3 and misses growth opportunities by

pricing these customers out of the market

Price

Consumer Surplus
Money Left on the Table

P*

Demand

Lost Opportunity
Deadweight Loss
MC

MR

Profit

Quantity

Charging a single price when facing a downward-sloping

demand curve leaves two areas of profit opportunity untapped.

PRICE DISCRIMINATION (OR SEGMENTED PRICING)

FirstDegree
o
o

Consumerspaytheir(maximum)WTP
Companyextractsallconsumersurplus

SecondDegree: customersselfselectdifferentpricepoints
Sellersofferthesamesetofproductandpricingoptionstoall
customers(passiveprograms)
o Pricecustomizationisachievedthroughthecustomersownchoices
o

ThirdDegree: sellersselectthepricepointsfordifferent
customersorsegments
Thefirmattemptstopursuedifferentpricesfordifferentcustomers
o Requiresactive(versuspassive)programstoidentifycustomer
segmentsandrealizeongoingpricecustomization
o

PRICE METRICS AND PRICE FENCES

Pricemetricsaretheunitstowhichthepriceisapplied.
Goodpricemetricsshould
o
o
o
o
o

trackwithdifferencesinvalueacrosssegments
trackwithdifferencesincosttoserve
beeasilymeasurableandenforceable
createfavorablepositioningversuscompetition
alignwithhowbuyersexperiencevalueinuse

Examples?
Pricefencesareameanstopricediscrimination(charge
differentcustomersdifferentprices)

BY QUANTITY
Largequantitybuyersareusuallymorepricesensitive

volumediscount
orderdiscount
stepdiscount

BY PRODUCT
Someconsumerswantuniquefeatureandarelessprice
sensitive
o

productlinedifferentiationatthesametime

Horizontaldimension(taste)
Verticaldimension(quality)

introducedifferentversionsatdifferenttime

Key
o
o

Understandconsumerneedstosortconsumers
Buildpricefences

Method1:cutpriceofhighendversiontoensurehighvaluecustomers
buyhighend
Method2:Damageyourlowendversionenoughtomakeitunattractive
tothehighvaluecustomers

Pricedifferencecanbemuchhigherthancostdifference

Sometimeslowerqualityversionmayevencostmore
7

EXAMPLE:BUILDING FENCES
ProblemfacingIntelwhenitintroduced486chip
(twotypesofearlyadopters) E,G(50%ofeachtype),Eis
willingtopaymoreandperformsalotofmathcalculations
WTP
$1000
$800

Buyer
E
E&G

Revenue
$1000
$1600

HowshouldIntelpricethe486chip?

BUNDLING
Differentbundlesorunbundledproductsfordifferent
segments

Reasonsforbundling
Complementarityindemand
Complementarityinsupply
Extendingmonopolypowerinoneproducttoinfluencesales
intheother
Negativelycorrelatedvaluationsacrosssegments
9

BUNDLING EXAMPLE
Adam

Bob

Cindy

100

50

25

25

100

50

50

25

100

V(W+E)

125

150

75

V(all)

175

175

175

Optimal
Price Profit

FirmMownsproductsWandE.
FirmFownsproductP.
Variablecostforallproducts=0.001

Question:WhatmighthappentofirmF?

BY CONSUMERS
Segmentationbasedonobservableconsumercharacteristics
thatsignalorarecorrelatedwithconsumersWTP
Key:selectsegmentationvariablesthat
separateconsumersintogroupswithdifferentWTP
o areeasilyobservablewithouthavingtoincurhighcosts
o arenotsociallysensitive
o Canbesmartwaytoinduceconsumerstovolunteerobjective
information
o

11

BY PURCHASE LOCATION
ConsumersatdifferentpurchaselocationsmayhavedifferentWTP
o
o

multipleoffices/storesindifferentlocations
examples

Key:selectsegmentationvariablesthatensure
o
o

differentsegmentspurchaseatdifferentlocations
highshipping(transaction)costtopreventarbitrage

Example:Pricingbulkyindustrialproducts(e.g.steelorcoal)

12

BY TIME OF PURCHASE
Chargedifferentpricesbecausecostandpricesensitivityare
differentatdifferenttimes
peakloadpricing:designedtoredistributeusagefrompeaktime
tooffpeaktime(costbased)
o yieldmanagement:pricingseatsatdiscountweeksbeforeaflight
andstillhaveenoughseatslefttoserveitsbestcustomersatfull
fare?(costandcustomerbased)
o Prioritypricingorskimmingpricingfornewproduct
o

Key
o

avoidresale

justifiedbycostdifference(tomakeitseemfairtoconsumers)

nontransferableairlinetickets

13

TAKEAWAY FROM THIS LECTURE

Pricediscriminationcansignificantlyincreasesprofit.Itmay
reflect
o

Differentconsumerwillingnesstopay

Differentcostofservingconsumer

Intentionoflockinfuturesalestowincompetition

Buildfencesforpricediscrimination
o

Byquantity

Byproductorbundles

Byconsumer

Bypurchaselocation

Bytimeofpurchase

Paycloseattentiontoarbitrage,competition,&legalissues
14

NEXT SESSION
EVC,WTP,andValuebasedPricing

Economicvaluetothecustomer
Factorsinfluencingactualwillingnesstopay
ValuebasedpricingandEVCanalysis

15