Establishing the price of a product or service is a much more complex task than it seems. It's not just about considering financial costs, customer value and the company's strategic objectives. Establishing the price of a product or service also means analyzing the potential reactions of competitors and exploring different possible pricing options in order to increase business revenue . Learn how to define a good price segmentation strategy to increase your business revenue.
Segment customers to increase business revenue
To increase your business revenue through price segmentation, you must first of all know how to adequately segment your target clientele. It is important to highlight a fundamental concept: every consumer is different . Consumers' relationship to purchasing evolves over time. Consumer thoughts have been shaped through their shopping experiences, market knowledge, value perception, personality, emotions and more! This is why it is said that no two consumers are the same.
However, although each consumer is unique, many times it is possible to distinguish consumer segments across a given population . In marketing, market segmentation is the action of dividing a population (customers, prospects) into homogeneous subsets according to different criteria (socio-demographic data, needs, purchasing behavior, etc.). These segments will be determined based on certain key criteria that will differentiate each of the named segments. For example, a population could be segmented by gender, by age, by economic income, by beliefs, etc.
Price segmentation to increase business revenue
When it comes to increasing business revenues through a price segmentation strategy, companies will segment their target customers according to the perceived value that they attach to the product or service sold. In other words, customers will be segmented based on the amount they would be willing to pay for a given product or service . Price segmentation allows businesses to capture additional revenue.
To illustrate the price segmentation strategy, let's think for example of Netflix which segments its prices into different packages in order to capture the maximum possible revenue: there are cheaper packages and others more expensive which each give access to different benefits. In this way, Netflix is able to reach a much broader customer base: those who are willing to pay less and those who are willing to pay more. The price segmentation strategy allows Netflix to increase its business revenue.
If the price segmentation strategy is well defined and well applied, the company will have the opportunity to increase its revenue; which it could not have done in a single pricing strategy. Companies that offer a single price tend to miss out on a lot of potential profit . These lost potential profits are attributable both to customers who are not ready to spend the asking price and to customers who would have been ready to pay more for the good or service in question. The price segmentation strategy makes it possible to seek out this potential profit in order to increase the company's revenue.
The negative sides of price segmentation
Price segmentation, although attractive for increasing business revenue, can be frowned upon in the eye of the consumer. Consumers might be upset to see the same item they purchased online for much less in store. Furthermore, the consumer who would be ready to spend more, and therefore who has greater value for your company, will not tell you that he is ready to spend more than the sale price, and this is quite logical: why would a consumer want to pay more than his neighbor? This observation helps illustrate that the price segmentation strategy tends to be more efficient during an unusual purchase where the consumer knows the market, the competitors and the different prices less well and has no, or almost no, Had similar purchasing experience in the past. Increasing your business revenue through price segmentation is therefore a good practice for this type of clientele since the risk of offending the consumer is much lower.
Increase your business revenue through price segmentation
In order to increase business revenues by implementing a profitable price segmentation strategy, companies frequently use 3 different mechanisms , which most of the time are used jointly:
- The mechanism of supply configuration
- The Mechanism of Price Metrics
- The mechanism of price barriers
Increase your business income through the offer configuration mechanism
The offer configuration mechanism is one of the simplest to implement in order to increase your business income. By using this mechanism, it is generally consumers who are called upon to create the offer that suits them based on the price they are willing to pay. For example. this is a frequent practice in training rooms where each individual is invited to choose the monthly package that suits them best: access to the gym, access to the gym + access to group classes, access + access to the VIP relaxation area .
In such a scenario, the company must determine the different packages available as well as the associated price. She can thus create value-added packages and hope to succeed in increasing the customer's value in addition to increasing her business revenue. Although this approach may seem very efficient, unfortunately this is not always the case due to the high differences in variable costs between different consumer segments.
Increase your business revenue through the mechanism of price metrics
The mechanism of price metrics is a little more complex to master in order to increase your business revenue. We are talking here about a pricing strategy based on the metric chosen to establish the price: unit, number of uses, period of time, number of people, etc. Often, a company's innovation in pricing metrics will have a significant impact on the market in which it operates. Several large companies lost face when new players proposed an innovative metric that better suited consumers' needs, as was the case with Uber, Airbnb and Spotify.
There are 5 criteria to determine the most profitable metric for the company :
- Variations in perceived value between different segments;
- Variations in variable costs between different segments;
- The ease of setting up and measuring the impacts of the metric used;
- The perceived value of the offer compared to the competition;
- The benefits that a metric can bring to consumers.
Increase your business income through the price barrier mechanism
The price barrier mechanism is probably the most complex to use to increase business revenue since it is more subjective to consumers. Indeed, the value attributed to a purchasing criterion can be very different from one consumer segment to another: for one consumer, the color of a sweater may be the main purchasing criterion, while for another consumer this could be the materials used, the provenance, or even the brand. What one consumer considers essential may be trivial to another.
For example, a customer who cannot read English will see great added value in a company that offers a bilingual website and may be willing to pay more for the service, unlike a customer who understands the language very well. English and for whom a bilingual site does not represent added value. Businesses must strive to discern the different barriers of consumers in order to offer them the best possible price and in the most profitable way possible in order to increase their business revenue.
Increasing your business's revenue is a very difficult task. There is a range of strategies that a company can implement to increase its revenues, including price segmentation. This strategy, although complex to implement, can become a significant competitive advantage for a company. Price segmentation helps capture additional revenue that would otherwise have been lost. Increasing business revenue is a constant challenge: the price segmentation strategy is one of the strategies that allows you to face this challenge.
Source: Nagle, T. and G. Müller (2018). The Strategy and Tactics of Pricing: A Guide to Growing More Profitably.