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Pricing and Product Strategy Market Segmentation
Chapter 4 – Price Structure (Segmentation Pricing Tactics) Market Segmentation – dividing consumers into segments that allow a firm to more effectively and efficiently market to consumers within that segment. STP Process SEGMENT TARGET POSITION
Segmented Pricing • Firm’s can utilize price as a market segmentation tool. • Price segmentation is based on the premise that distinct differences exist between groups of consumers. These differences can be directly related to costs, price sensitivities, competition, and purchase motivations. • Competitors and buyers will not want to cooperate with a firm’s segmentation of the market by price. The Microsoft Windows operating system is a good example. • Segmenting a market based on price can be illegal. Price segmenting solely on the tangible product will generally be illegal. Price segmenting based on intangible attributes will generally not be illegal (e. g. , amount of service).
Price-Segmentation Model • Price Segment – These consumers seek to purchase at the lowest price consistent with a minimum level of acceptable quality that many brands could meet. These consumers do not make feature benefit trade-offs and are not convinced to pay more for the unique added value of superior features, service, or supplier reputation. Example: Typical of many products sold at Costco • Loyal Segment – These consumers already have a preference for one brand, based on its unique reputation, its unique features, or on their past experience with the product. If the price of the brand does not exceed what they are willing to pay, then they will purchase the brand without evaluating potential alternatives. Example: Most personal hygiene products - shampoo, deodorant, toothpaste
Price-Segmentation Model • Value Segment – These consumers are price sensitive since they are either making large expenditures or have limited incomes (or both). These consumers are also sensitive to differences offered by various suppliers. When these consumers purchase a high-priced brand, they will do so only after evaluating the prices and features of alternatives and determining that the added value is worth the cost. Example: Geo Metro, Ford Focus • Convenience Segment – These consumers are not particularly concerned about differences between brands or the cost between brands. These consumers typically purchase whatever is available, minimizing their search and their evaluation of prices and features. Example: Milk, packaged bird seed
Price Segmenting by Buyer Identification • Price segmenting by buyer identification means nothing more than mere identification of a segment by its characteristics. Examples: Airlines – first class, business, coach fares Airlines – infant, children, adult fares Student Discounts – local retail Senior Discounts – local retail Membership – AARP, AAA Low Income Waivers and Discounts – especially in medical services US Income Tax System – “fee” charged for earning specific income level • Successful price segmenting based on buyer identification relies heavily on having detailed information of the segments so that price sensitivities can be accurately assessed.
Price Segmenting by Purchase Location • Price segmenting by purchase location assumes that price sensitivities in different locations of a market exist. Examples: Grocery and drug store chains Real estate Steel and iron products College textbooks • Classic technique of price segmenting by location is called freight absorption (basing-point pricing, phantom freight). Freight absorption is illegal in some industries. • Price segmenting by purchase location is cumbersome and many consumers are aggressively opposed to this form of price segmenting.
Price Segmenting by Time of Purchase • Price segmenting by time of purchase reflects the fact that price sensitivities can change due to time of day, week, or season. Peak-load pricing is used when different cost structures exist to serve customers at different times. Examples: Restaurants – lunch, dinner menus Hotels – high season, dead season Theatres – weekend, weekday, matinee, evening Automobile rental – high season, dead season Clothing – winter, spring, summer • Peak-load Pricing – this pricing strategy is used when the existing supply is exceeded by the demand in the market. Firms change their price(s) to reflect high demand. The objective is to maximize use without overloading the capacity available. Examples include airlines, restaurants, utilities, parking garages, long-distance telephone service.
Price Segmenting by Time of Purchase • Yield Management – integrates the differences in the cost of providing the product/service with price sensitivity of the segment. Yield management is synonymous with revenue management. Examples: Passenger airlines Hotels Rental cars Cruise lines Freight transportation Sporting events Theatres Casinos
Price Segmenting by Purchase Quantity • Quantity discounts are often used where quantities purchased vary from buyer to buyer. Four types of quantity discount tactics: • Volume Discounts • Order Discounts • Step Discounts • Two-Part Prices
Price Segmenting by Purchase Quantity • Volume Discounts – generally, consumers that purchase in large volumes are more price sensitive since they have a financial incentive to seek alternative and “best prices. ” Volume discounts are based on the total purchased over a set period of time and not on the individual order sizes of each purchase. The discount is based on the total purchase size over the set period of time. Volume discounts are illegal is they result in higher costs for small firms relative to large firms that purchase larger volumes. This would have the effect of lessening market competition. Examples: high-tech equipment, steel, aluminum
Price Segmenting by Purchase Quantity • Order Discounts – the per-unit cost of processing and shipping declines with higher quantities ordered. As a result, some firms would like larger and more infrequent orders. Where volume discounts have the purpose of discounting to retain large customers, order discounts have the purpose of encouraging customers to place larger orders. Extremely popular discounting method in the business-to-business markets (industrial markets), where order processing and shipping costs can represent over one-half of the cost of an order.
Price Segmenting by Purchase Quantity • Step Discounts – sometimes called block discounts, are discounts applied when purchases exceed a specified amount. Customers are segmented based on type of customer and the volume purchased. Step discounts are prevalent in the utilities industries. For example, electric utilities charge separates for residential, business, and industrial usage of electricity. The electric utility will also charge difference rates in each consumer class based on the total amount consumed (purchased) and what the electricity was consumed for when used by the customer.
Price Segmenting by Purchase Quantity • Two-part Pricing – this pricing strategy involves making two charges for the purchase of a single product. The classic examples of two-part pricing are some amusement parks and rental cars.
Price Segmenting by Product Design • Price segmenting by product design is usually the most effective and efficient means of price segmenting a market. This strategy requires that a firm offer different versions of a “core product or service. ” The firm attempts to “augment” the core product or service with attributes that can successfully segment the market. Advil Pain Reliever Caplets, Tablets, Liqui-Gels Counts of 2, 10, 50 Dodge Ram 2500 Regular Cab, Quad Cab, Mega Cab ST, SLT, Power Wagon