Wednesday, October 17, 2012

Pricing Strategy Lessons From Price Differentiation and Segmentation

Guest post  - By Patrick Campbell, CEO Price Intelligently

In an effort to capture as much cash from their customers as possible, recently implemented a “big data” strategy where Mac users visiting their site were charged more than PC users, because their thorough analysis discovered Apple’s pilgrims had a higher willingness to pay. When the public discovered their strategy, outrage ensued with cites of price discrimination and a question of the legality of such practices. Yet, although charging someone on average $30 more because of the logo on their computer seems strange, is actually following an exceptionally effective pricing strategy known as price differentiation, which harnesses and utilizes their differing customer’s varying willingness to pay.

The cold hard truth is, unless you are doing something similar to Orbitz in your own business, you are leaving enormous profits on the table. To recapture those profits and put the most important aspect of your business (your pricing strategy) back on track, let’s explore why you need to connect your prices with each and every customer’s perception of value, before looking at a few different levers you can use to segment differing price sensitivity.


Value and willingness to pay: It’s not about you. It’s about them.
Price segmentation seems like a pretty simple concept, right? You charge people who are willing or able to pay more a higher price, or those who aren’t willing or able to pay as much a lower price. After all, this manner of pricing allows everyone to win, because everyone gets what they want at the price level they were willing to pay and the business squeezes as much out of each customer for the value they’re providing as possible. Yet, like a lot of best practices out there, this little concept isn’t utilized.

Instead, businesses tend to do one of two things: 1. they average higher and lower end prices for a middle most price offering, or 2. they charge customers what they want them to pay. The first method doesn’t work out, because you end up underpricing higher paying customers and overpricing lower paying customers. The second method doesn’t work, because customers don’t care about how much you think your product is worth. Customers only care about what they think your product is worth. This is what’s known as customer value and understanding your customers gets you close to to the coup de gras of pricing: value based pricing.

Companies with great pricing have been doing this for years through price bundling, tiered pricing, and even through what Orbitz is doing in flat-out price differentiation. The key is to personalize your offering(s) as much as possible. Check out any really successful restaurant menu. There will always be dishes or combinations of dishes at every price point. Steak for the ritzy crowd, salad for those trying to save a few bucks, and four courses for those going all out.

Price differentiation is simple through basic segmentation
Of course, with a restaurant menu, the customer is self identifying as to where in the willingness to pay spectrum they fall. In Orbitz’s (and more than likely your) case different data segments revealed price sensitivity of different customers. Through careful analysis their data scientists found Mac users were paying more, so they simply started showing Mac users higher prices. You don’t need a team of data engineers to do this yourself though. Instead, look at the data you have, and analyze it against average sale. We’ll start you off with a few segments you should slice pricing around:

1. Referring site
The upstream origination point of your potential customer can tell you a lot about their willingness to pay. If a user is coming from “Discount Diamond Warehouse” versus “Tiffany”, you can assume they’re searching for a deal. Similarly, Orbitz makes assumptions about visitors from,  where a user is more sensitive about price, versus TripAdvisor, where a user is more review focused. 
Where are your users coming from? If they’re coming from bargain shopping sites, then show them strike out prices or buy one get one type offers. If they’re coming from review sites, then charge a little bit more, because you’ve already created some social proof (as long as you have good reviews). Your pricing strategy should tailor to your personas just as much as your marketing strategy.

2. Return visits
If you gear your site towards quicker sales or offers, you should implement different tactics to push returning visitors closer to the sale. Countdown clocks with prices incrementing upwards are a phenomenal tactic for travel sites, but even in the ecommerce space you can display “limited quantities” that are “selling out quickly.”
More relationship focused sales or places where the price cannot change as easily should boost value based on what you learned about the user during their initial visit. For instance, if they filled out a form for more information or to download an ebook, have them self identify into a persona category (we do this on all our forms at Price Intelligently). Then, next time they visit, have the entire marketing funnel be geared towards that individual persona. It does wonders for your conversion rate.

3. Geography
You should never charge different geographies of individuals the same price, because geographical pricing can reap huge rewards. People in New York City have a much higher level of income than those in the Midwest. Costs are different, but in the online world this means the price sensitivity of the two groups are drastically different. does this beautifully by looking at the habits of their most popular routes (NYC to Miami, BOS to SFO, etc.) and adjusting prices as needed.

If you feel you can’t charge different regions of the country differently, then at least charge different countries differently. You can easily hide these differing prices by masking them in the currency of the other country (e.g. charging $10 in the US and £10 in the UK). Just make sure you’re analyzing the data, because geography is exceptionally easy to segment on to ensure you’re capturing as much cash as possible.

To summarize, you need to know thy customers and segment your offerings based on your differing customer’s differing willingness to pay. Keep in mind though, that communication is key. You’re going to run into a situation where Grandma Gabby in California sends a link to Grand Daughter Gretchen in Wisconsin and they both see a different price. In those instances, have a policy in place that clears up the discrepancy quickly (give them the lower price, explain that you’re providing a personalized experience, etc.) to avoid any PR issues. Just remember, pricing is a process and should be focused around the value of your product to each and every specific customer. The more you know about that customer, the better.

To learn more about pricing strategy, check out our Pricing Strategy e-book or sign up for our Pricing Page BootCamp (it’s free!).


Mark Entwistle said...

Great article, excellent points. Pricing can be such a challenge and you explained it well. Can you give me the answer for my specific situation now!

Patrick Campbell said...

Thanks, Mark!

More than happy to answer any questions. Feel free to send me an email at

Matthew Balfour said...

Great blog as usual Patrick, keep the great Pricing Thought Leadership coming !

The best advice in this article: "you need to know thy customers and segment your offerings based on your differing customer’s differing willingness to pay. Keep in mind though, that communication is key."