Price Structure:

Tactics for Pricing Differently Across

Customer Segments
Lesson 6
Pricing for Value
Elkana Ezekiel

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 CUSTOMERS VALUE PRODUCTS
DIFFERENTLY
Usage Occasion Urgency Alternatives

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 COST TO SERVE VARIES
Criticality of Demand Timing of Demand Purchase Process

BALANCE BETWEEN VOLUME, PROFIT & MARKET SHARE

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The benefits of price segmentation
Customer Segment  A B C D E TOTAL

VIABLE PRICES $20 $15 $10 $8 $6

SEGMENT SALES 50 150 350 250 200 1000

POTENTIAL(‘000)
PERCENT OF 5 15 35 25 20 100
BUSINESS
CONTRIBUTION Variable cost per unit = $5. Cont.= (Price-VC) x segment size
($.’000) WITH:
1 PRICE( $10)
2 PRICES($15, $8)
3 PRICES($20, $15, $10,
$8, $6)

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 The benefits of price segmentation
Customer Segment A B C D E TOTAL

VIABLE PRICES $20 $15 $10 $8 $6

SEGMENT SALES 50 150 350 250 200 1000

POTENTIAL(‘000)
PERCENT OF 5 15 35 25 20 100
BUSINESS
CONTRIBUTION Variable cost per unit = $5. Cont.= (Price-VC) x segment size
($.’000) WITH:
1 PRICE( $10) 250 750 1750 0 0 2750

2 PRICES($15, $8)
3 PRICES($20, $15, $10,
$8, $6)

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The benefits of price segmentation
Customer Segment A B C D E TOTAL

VIABLE PRICES $20 $15 $10 $8 $6

SEGMENT SALES 50 150 350 250 200 1000

POTENTIAL(‘000)
PERCENT OF 5 15 35 25 20 100
BUSINESS
CONTRIBUTION Variable cost per unit = $5. Cont.= (Price-VC) x segment size
($.’000) WITH:
1 PRICE( $10) 250 750 1750 0 0 2750

2 PRICES($15, $8) 500 1500 1050 750 0 3800

3 PRICES($20, $15, $10,

$8, $6)

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 The benefits of price segmentation
Customer Segment A B C D E TOTAL

VIABLE PRICES $20 $15 $10 $8 $6

SEGMENT SALES 50 150 350 250 200 1000

POTENTIAL(‘000)
PERCENT OF 5 15 35 25 20 100
BUSINESS
CONTRIBUTION Variable cost per unit = $5. Cont.= (Price-VC) x segment size
($.’000) WITH:
1 PRICE( $10) 250 750 1750 0 0 2750

2 PRICES($15, $8) 500 1500 1050 750 0 3800

3 PRICES($20, $15, $10, 750 1500 1750 750 200 4950

$8, $6)

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DISCUSSION:
So why isn't everyone offering multiple price points?
1. WHAT ARE THE POTENTIAL ISSUES?
2. HOW COULD ONE GET AROUND THESE ISSUES?

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 Group 1: Rs. 1, 25,000 Group 2: Rs. 1,15,000 Group 3: Rs. 1,00,000

• No accessories
• Door delivery • Door delivery • 100% payment in advance
• EMI facility • EMI facility • You have to pick up from
• Free servicing & maintenance for 2 years • Free servicing & maintenance my showroom
• 2 years, 24,000 km extended warranty for 1 year • Standard warranty
• Loaner bike during servicing • 1 year, 12,000 km extended • 1st service free
• Free accessories: warranty
• inner box • Free accessories:
• kick cover & grip cover • inner box
• floor mat • anti-rust coating
• anti-rust coating
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 So we are able to charge different prices to different segments
by varying not just the price, but..
The offer itself  Price-Offer combination &
The criteria to qualify for the price:

PRICE METRICS – What we charge you for?

PRICE STRUCTUREPRICE FENCES – Who is eligible for what price?

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 Price-offer configuration
Airline Tickets Health Clubs:

◦ No check-in baggage ◦ Unlimited access – Annual Plan

◦ Non-refundable vs. refundable ◦ Gym only; Spa at discount

◦ Fixed dates vs. Flexi dates ◦ Weekends unlimited; Restricted weekdays

◦ Seat selection vs. pre-assigned ◦ Pay per use

To create an effective price structure, the firm must decide which features & services should be
priced à la carte Vs. bundled into a package (e.g. buffet meal)

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OPTIMIZING AN OFFER BUNDLE
SUBSCRIBERS ENGLISH CHANNEL REGIONAL CHANNEL COMBINED
ENGLISH MOVIE FANS (30%) 30 5 <35
REGIONAL MOVIE FANS (70%) 10 20 <30

OPTIONS
- Sell the individual channels to the different segments  Excludes some cross channel fans.
Total Revenue = 2300
- The network bundle the two channels and charge between $23 and $30 to bring in additional cross
channel fans
- Combined subscription @ 27 for both  Total Revenue = 2700
- At say $ 27, all English channel fans would sign up for the combined offer
- At $ 27, pure Regional Channel fans would reject the offer and subscribe to only the Regional
channel at $ 20
- Primary customers of Regional Channels with a secondary interest in English movies may find the
$27 bundle attractive
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 Bundling & Unbundling
GOAL OF THE FIRM: MAXIMIZE REVENUE & PROFIT
Bundling is a strategy to attract customers that need a lower price without impacting full price customers
◦ Flat Price Drop  Loss of revenue from regular full price customers

1. Bundle options that small customers value (e.g. free training; on site customer support). Unbundle them for
large customers & provide a rebate

2. Add features that kill value for the higher-priced segment without affecting value to the discounted segment-
“selective uglification” or disincentives to full price customers

◦ e.g. some discounted airline tickets that require the passenger to stay on Saturday night at the location

Bundling “free” services only works if Cost To Serve is lower than

the price realized

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 Price Metrics
The unit to which the price is applied:

◦ What do you get when you buy one unit of a product / service?

Car Rental: Fees could be charged

- Per day / week / month  Time
- Per km  Distance
- Flat fee  Point to Point
- Add Ons  Insurance, Chauffeur, Breakdown Services, etc.

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Performance Based metrics
Metrics could link Customer Price to
1. Economic Value received (by Customer)
2. Incremental Cost to Serve (of the Seller)

◦ Examples
◦ CPM vs. CPC for digital ads
◦ Cash vs. equity in employee annual compensation
◦ Legal Firms: A retainer or flat rate per hour + a share of the settlement value
◦ Consulting Firms: Base project price + Bonuses linked to milestones

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 Creating good metrics
STEP 1: How do current metrics align with Value Delivered
& Cost to Serve?
◦ What proportion of current customers get value
significantly in excess of what they pay?
◦ What proportion is only marginally profitable due to the
high differential costs of service?
◦ Are you missing any sales volumes that you could have
obtained by pricing on an incremental basis?

STEP 2:
Identify metrics that could be viable alternatives

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GE Aero Engine Pricing
GE was launching a new, highly efficient aircraft engine (G90)

◦ Greater fuel efficiency + Greater power  Higher profit for airlines

Airlines were interested – Doubts about high maintenance costs

GE changed the metric

◦ From - selling/leasing cost per engine

◦ To - rental fee per hour flown, including all maintenance charges

With the uncertainty removed, this engine became a huge success for GE

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 Metrics to Manage Profits & Costs
 Metrics must reflect Incremental Cost to Serve  EXAMPLES:
when these costs are significant
 Extra fee for last minute change in orders  Trains
customers to be vigilant; makes these orders viable for
Marketers fear becoming uncompetitive by charging the seller and generates better profit margins
for services. But
 Charging differential rates for 100% on-site service vs.
 If designed well, customers will pay for what they a lower rate for customers who don’t need this level of
value most service

 Charging for high cost services screens out  Chemical supplier  Flat price/ton.
- Reduced basic price  Added new customers
unprofitable customers - Charged extra for special and rush orders
- Discounts for unchanged orders inside 10 days of
shipment

RESULT:
IMPROVED PROFITABILITY AND PLANT
PRODUCTIVITY

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 Price Fences
A CONDITION A CUSTOMER MUST FULFIL TO QUALIFY FOR A SPECIAL PRICE OR OFFER

◦ Increase base of customers – Volume driver

◦ Maximize transactions at the highest prices – Profit driver

Examples:

◦ Age - for children or senior citizens

◦ Profession – student discounts for flights, Armed Forces in CSD, employee discounts

◦ Place of origin – Museums / National Monuments giving discounts to citizens vs. foreigners

◦ Volume – Discounts above a certain volume of purchase

While price fences are simple to administer, they may be easy to circumvent if not designed well

◦ Can you think of a few examples where a fence can be exploited?

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 Customer segmentation using price fences
1.BUYER IDENTIFICATION
◦ Using customer’s education, profession, credit history, etc. to offer loan @ special
rates
◦ Business travelers vs. holiday guests
◦ Electricity for commercial enterprises vs. home users

To succeed it should be possible to identify the segment e.g. student ID cards,

industrial license proof, etc.
◦ CAVEAT: Difficult to isolate price sensitive customers from less sensitive ones

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 Customer segmentation using price fences

2. PURCHASE LOCATION
◦ Movie halls expensive tickets in upmarket neighborhoods
◦ Doctors  home visit vs. at the clinic vs. at the OPD
◦ Ski resort In city grocery stores vs. near ski slopes
◦ Freight absorption To attract customers in distant locations

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 Customer segmentation using price fences
3. TIME OF PURCHASE

◦ Matinee Show Delinquent students / office goers 

◦ All You Can Eat lunch buffets  Office / Business crowd

◦ Airline Peak Hour Pricing  Unsold seats cannot be held as inventory

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 Customer segmentation using price fences

4. PRIORITY PRICING
◦ Priority Preview: Premium customers get “First Look” at fashion collections
◦ Innovators: High priced new flagship phones; older phones discounted

Eurotunnel pricing between England and France

◦ Peak and off-peak prices vary dramatically

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 Customer segmentation using price fences
5. Purchase Quantity
◦ Volume discounts – based on total purchases by a customer over a given
period of time.
◦ E.g. steel manufacturers offer better prices to auto firms due to high offtake
◦ 6 packs of drinks cost less than a single can; full tray of eggs cost less than
buying 6 eggs individually
◦ Size of Order – discount on the value of each order above a limit – e.g. shop
for Rs.10,000 & get 10% off, etc.

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 Customer segmentation using price fences
6. Step discounts
Discount beyond a specific amount & only on the additional quantity
◦ e.g. In Singapore the water utility provider penalizes consumption above a set limit
through higher prices
◦ Two part prices - two separate charges to use a service
◦ night-club cover charge + pay for drinks
◦ amusement parks - entry fee + additional fees for each ride
◦ car rentals - a fixed charge (Rs. 1200 - 8 hours, 80 km) + a variable charge beyond
this (Rs.10/km, Rs.100/hour)

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 Customer segmentation using price fences
5. PRODUCT BUNDLING:
The bundled products need to help meet certain objectives of the seller as well as the buyer to be
successful
Bundling can be indivisible or optional
◦ Tata Sky bundled packages vs. buying individual channels
◦ A set meal vs. a la carte vs. buffet all you can eat

◦ Offers in modern trade stores e.g. buy Rs.500 worth of groceries and get a bowl set at 50% off

Value-added bundling – to attract price-sensitive customers without discounting to the relatively less
price-sensitive customers e.g. full price paying car customers gets all “Extras” free vs. basic car at
discounted price

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ASSIGNMENT

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CREATING A PRICE STRUCTURE
You are the new General Manager of the Taj Mahal. The one in Agra. The
one made by Shah Jahan. Not the Taj Hotel in Bombay. The Real Thing.

As GM you need to create a new Price Structure to increase footfalls and

drive revenue and profits.

Prepare your recommendations for submission to the PMO.

Time to think  5 minutes

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 Guidelines on bundling/unbundling

1. Unbundle the price of any value-added service that is used at the customer’s discretion

◦ If the service is differentiating, charge for it separately

◦ If it is industry standard, offer a discount for forgoing it

2. Unbundle differentiating product attributes and price them separately targeting customers who truly
value these features

◦ E.g. The Royal Enfield Bullet dealer

3. Unbundle costs to serve(e.g. shipping cost) that vary across customers

◦ however if your competitor’s product is cheaper to a specific customer, then you can bundle the
costs to discount the offer for that particular customer

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 Customer segmentation using price fences
6. TIE-INS AND METERING
Intensity of use  Greater value to customer
Examples:
◦ HP: Low pricing for printers + Proprietary HP Cartridges (High Priced)
◦ Ensures wide base of profitable customers
◦ Gillette shaving razors are priced (relatively) low, while they make money from blades. 95% of the division’s profits from
blades
Metering - pricing connected to something that correlates to value, other than use of a tie-in product
◦ Auto warranty linked to miles / km travelled
◦ Film distributors renting movies based on the number of seats in the theatre
◦ McDonalds leasing brand to franchisee for a percentage of sales instead of a fixed fee
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 Customer segmentation using price fences
7. PRODUCT DESIGN

Making changes in the product that make it unattractive to full price customers

◦ Post dollar depreciation, prices of product were significantly lower in the US than in Europe. To prevent
Europeans from simply buying in the US, Apple changed its universal transformer to a 110v one that
could only be used in the US.

◦ To prevent customers from buying cheaper HP cartridges from online sites abroad, HP changed the
electronics design of the cartridges so that cartridges made abroad would not work in US made printers

To make this tactic work, it is important to offer a lower-priced version of the product that is inadequate for
its price-insensitive users, but ok for price-sensitive buyers - unbundling is key here

◦ Intel marginally modified Pentium chip at no extra cost to create the Celeron chip for price-sensitive
customers

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 To sum up…
SEGMENTED PRICING CAN SIGNIFICANTLY IMPROVE THE BOTTOM
LINE
For industries with high fixed costs to be sustainable
◦ Railroad companies differential pricing for cargo vs. passengers

For spurring innovation

◦ Customers paying a Premium for Innovation drives investment in further R&D

◦ Firms neglecting low end or mass markets are vulnerable to new, price based
competitors with better cost structures
e.g. Samsung Vs. Chinese brands

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Thank you

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