What Is Price Segmentation?
Price segmentation is one of the pricing strategies a company can deploy to maximize its revenue. This strategy involves charging groups of customers different prices for a similar product or service, often based purely on a customer’s willingness to pay a higher price for the same product or service.
It’s a popular strategy with fashion eCommerce companies. They may charge more for a pair of long leather boots in winter but lower the price considerably in summer when boots aren’t in high demand. This way, the higher pricing can sustain the business and protect revenue in the off-season.
Segmentation can be based on time, offering, volume, or location.
Examples of Price Segmentation
Companies use Volume Price Segmentation when they charge customers a lower price per unit. A good example would be a gym that charges different fees to customers that subscribe to a month-to-month contract versus those that sign up for an annual membership or clothing brands that sell socks in bulk bundles.
This technique appeals to different segments: those who want flexibility and are willing to pay more for it, and want to save money over the longer term.
This doesn’t only apply to products. Digital entertainment companies like Netflix charge more for a subscription for a single user than a family-orientated package.
Location and Channel Price
Location Price Segmentation often occurs in the events industry. Some customers are willing to pay more for a seat closer to the concert’s main stage; others are happy just to attend at a lower price.
In the fashion industry, location can determine pricing too. Some eCommerce platforms will sell their swimwear at heavy discounts in an area experiencing winter while charging different pricing for the same items in warmer climates or another hemisphere.
Markets can be different from state to state. A savvy eCommerce company will identify that a New England shopper will buy a heavy winter jacket in Fall, but a Californian will buy something lighter. Pricing for these items will differ.
Similarly, different team jerseys will carry different pricing during football season depending on the location where it is sold. You may pay less for a Cardinals jersey in New York than in Arizona.
Channel Price Segmentation is segmentation based on the sales channel used. Retailers with an eCommerce store will sometimes sell clothing and other products at a discounted rate if purchased online rather than the physical store.
Service Offered Price
Service offered pricing is a segmentation strategy based on conditions of service. An eCommerce store may charge less for items that are non-refundable than refundable items because their risks are lowered.
Attribute Offered Price Segmentation is similar but based on the quality of the product. Customers pay more for a genuine designer clothing item than an off-the-shelf generic version of the same item. A leather jacket will cost more than the pleather version, and a vegan leather option may cost most of all! Your vegan customers will pay a premium for items that align with their ethics.
Time of Purchase
Time of Purchase Segmentation is a strategy practiced by companies that experience seasonality. The product is the same, but the value of the experience is different across seasons. You can buy a raincoat any time of year, but you probably won’t need one until winter.
In the fashion industry, seasonality refers to more than the weather. Seasonality impacts segments and pricing. Some customers will pay a premium for the latest styles; others will wait for the end-of-season sale to pay less for the same product.
In the eCommerce industry, this type of strategy is highly complex and hard to implement.
Segmentation in the eCommerce Industry (Practical Examples to Implement)
eCommerce sales is more involved than simply running discounts before Christmas. Segmentation is about getting the most out of every holiday and season, considering each type of customer.
Holidays and seasons result in fluctuations in site traffic, purchase intent, customer interest, and advertising costs.
Time of purchase pricing isn’t just about turning a profit but being customer-centric and ensuring that your eCommerce experience is relevant to your customers and their needs.
Any holiday can present an opportunity to strategize, for example:
- New Year’s Eve
- Chinese New Year
- Valentine’s Day
- Mother’s and Father’s Day (occurring on different days around the world)
- Summer vacation
- Black Friday
These days will see traffic skyrocket and shopping behaviors change. Customers will pay more for quality gifts at Christmas but will buy more for less on Black Friday. On Black Friday, innovative eCommerce stores will lure shoppers with lower-priced items but encourage them to purchase add-ons at the full price to keep revenues going.
On- and Off-Season Pricing
Customers are more likely to buy and impulse-buy during the on-season. Higher pricing won’t deter the fashionistas that want to grab the latest and greatest. As the season progresses, price your products to create a sense of urgency can push them from consideration to the cart in a flash. Fire sales or big clearance sales are two good examples.
Some customers are willing to pay for the latest and greatest fashion at a premium. Many eCommerce stores host VIP versions of their site that is promoted by invitation only. They sell their clothing to fashion lovers at a premium for a few days as an exclusive shopping experience, then open it to the general public. During the final stage, they sell the unsold inventory at a reduced price during the end-of-season sale.
During the off-season, customers take more time in making a decision, especially for larger ticket items. Your pricing strategy must match competitors’ as they are doing more comparison shopping. You’ll sell less, so you could opt to charge more to optimize profits.
It’s vital to keep an eye on how customers respond to these pricing changes. There will be a tipping point where prices are low enough to convert them to buying off-season goods and a tipping point that makes it too expensive.
What Are the Benefits?
Price segmentation optimizes profits and overall revenues, particularly for companies that have high fixed cost structures. It also assists companies with customers with varied needs that can be identified, isolated, and served.
Seasonal Pricing Segmentation can enable companies to smooth demand by enticing customers to pay lower prices during a slow period while maximizing revenues when the demand is strong.
The profits of the peak season can carry the business when the season is low.
How to Implement a Seasonal Pricing Strategy
It may sound simple to implement – charge less in the off-season, charge more in-season. The reality is that it is very complex to execute a pricing segmentation strategy effectively. The many steps include:
Identify Customer Segments
Companies need to identify customer segments and segment them on factors like their willingness to pay. Depending on how they are segmented, some may pay less for similar products than others (e.g., student discounts).
Determine Extent of Willingness-to-Pay
Some segments are willing to pay significantly more than others. Other segments may catch onto the seasonal pricing and change their behavior, e.g., waiting for the big seasonal sale before purchasing. Their behavior has to be monitored and their willingness to spend measured.
Build an Effective Price Segmentation Mechanism
Your company has to subtly implement price segmentation so that it doesn’t appear to be discriminatory. It’s not as easy as asking a wealthy customer to pay more because they can afford it! Price segmentation has to be efficient, subtle, and effective.
It may take complex analyses and experimentation to get it right.
Use the Right Price Segmentation Tools
Does this sound complicated? How do you know how to price for different customers? How will you hit the right mark with your product and different prices? What are they willing to pay?
Luckily, EpiProdux can help you manage the entire price segmentation process. With EpiProdux, you can grow your revenue substantially by delivering the right product to the right customer segment in the right market.
You can create a pricing strategy that will boost your profits and customer retention while lowering your customer acquisition costs.
EpiProdux can help you conduct the proper market research into your brand and product to maximize sales. EpiProdux can even help you develop products that your existing customers will love.
Speak to EpiProdux about the management of price segments and creating optimal pricing strategies that work for you and your customers