CHAPTER 4: PRICE STRUCTURE:
TACTICS FOR PRICING
DIFFERENTLY ACROSS CUSTOMER
SEGMENTS
UEF _ Feb 2025
LEARNING OBJECTIVES
[Link] the importance of segmented pricing in
maximizing profitability.
[Link] tactics for structuring prices to address diverse
customer needs.
[Link] price metrics and fences to implement effective
segmentation.
[Link] methods for optimizing bundles and
unbundling strategies.
OUTLINE
1. Challenges of Segmented Pricing
2. Creating Effective Price Metrics
3. Designing Price Fences
i. Buyer Identification Fences
ii. Purchase Location Fences
iii. Time-of-Purchase Fences
iv. Quantity-Based Fences
4. Bundling and Unbundling Strategies
CHALLENGES OF SEGMENTED PRICING
• Segmented pricing involves charging different prices for the
same or similar products based on customer segments.
• Segmentation can increase profitability but risks customer
dissatisfaction if perceived as unfair.
• Requires careful alignment of price differentiation with value
received by customers.
• Example: Airlines charging different prices for the same
seat based on booking time, flexibility, and loyalty status.
CHALLENGES OF SEGMENTED PRICING
• Guideline for Application
• Clearly communicate the rationale behind price
differences.
• Ensure differentiation is perceived as fair and value-
driven.
CREATING EFFECTIVE PRICE METRICS
• Price metrics are the units by which a customer is charged
(e.g., per unit, per hour, or per use).
• Performance – based metrics
• Tie – ins as metrics
• Key Characteristics of Good Price Metrics:
• Align with the value customers derive.
• Simple and easy to understand.
• Flexible to accommodate customer needs.
• Example: Cloud storage providers charging by the amount of
data stored or transferred.
CREATING EFFECTIVE PRICE METRICS
• Guideline for Application:
• Identify the primary value driver for customers (e.g., usage,
results).
• Regularly review and refine metrics to ensure relevance.
DESIGNING PRICE FENCES
Price fences are rules or conditions that customers must meet
to qualify for specific prices.
Types of Price Fences: Types of Price Fences:
• Buyer Identification Fences: • Time-of-Purchase Fences:
• Examples: Student discounts, senior • Examples: Early-bird discounts, peak-time
pricing. pricing.
• Application:Verify eligibility through IDs • Application: Use dynamic pricing models
or credentials.
for peak and off-peak periods.
• Purchase Location Fences:
• Quantity-Based Fences:
• Examples: In-store vs. online pricing.
• Examples: Bulk discounts, tiered pricing.
• Application: Differentiate prices based on
where the product is sold. • Application: Offer lower per-unit prices for
higher purchase volumes.
DESIGNING PRICE FENCES
• Guideline for Application:
• Match fences to customer segments and ensure transparency.
• Use technology to implement and manage complex fence
structures.
BUNDLING AND UNBUNDLING STRATEGIES
Bundling Unbundling
• Combining products or services into a single • Separating components of a product or service
package at a unified price. to allow customers to pay only for what they
• Advantages: need.
• Increases perceived value. • Advantages:
• Encourages customers to purchase • Attracts price-sensitive customers.
complementary items. • Increases flexibility and customer satisfaction.
• Example: Telecommunication companies • Example: Airlines charging separately for
offering internet, phone, and TV services as a baggage, seat selection, and in-flight meals.
bundle. • Guideline for Application:
• Guideline for Application: • Highlight the core value of the unbundled
• Identify complementary products with offering.
high customer demand. • Offer optional add-ons at transparent prices.
• Ensure the bundle price reflects combined
value.
SUMMARY
• Segmented pricing maximizes profitability by addressing diverse
customer needs.
• Effective price metrics and fences are essential for managing
segmentation.
• Bundling and unbundling strategies enhance flexibility and
customer satisfaction.
• Clear communication and fairness perceptions are critical for
success.
REVIEW QUESTIONS
1. What are the primary challenges of implementing segmented
pricing?
2. Explain the characteristics of effective price metrics.
3. Provide examples of different types of price fences.
4. How can bundling and unbundling strategies enhance
profitability?
5. Describe a real-world example of segmented pricing and its
effectiveness.
