Module 4

• Price structure


  How a marketer can most profitably capture the value created by their products or services
• Customers value products differently due to different abilities to pay, preferences, and intended uses
• The timing of customers' needs, the speed of their payments, and the level of service and support they require can drive significant differences in the cost to serve them
• When a company tries to serve all customers with one price, or a standard markup in the case of distributors and retailers, it is forced to make large tradeoffs between volume and margin
• Except for pure commodities, a single price per unit is rarely the best way to generate revenues
• Segmented price structure


  A structure of prices that aligns with the differences in economic value and cost to serve across customer segments

  
• The goal of a segmented price structure is to mitigate the tradeoff between winning high prices for low volume and high volume for low prices
• Segments willing to pay different prices

  • Segment 1 (50,000 units at $20)
  • Segment 2 (150,000 units at $15)
  • etc.
• A single-price strategy leaves excess money on the table for many buyers who are willing to pay more
• Serving additional customers at prices above variable cost can be very profitable and essential for a company's survival, especially for industries with high fixed costs
• Freight railroads survive and prosper by leveraging their capacity to serve multiple market segments at value-based prices for each segment
• Companies that serve only the premium end of a market often find it risky to limit themselves to that segment when they could be leveraging some common costs to serve other segments as well
• More segmentation is always better in principle, but the extent is limited by the ability of the seller to enforce it at an acceptable cost
• Customers whom you intend to charge a higher price have an incentive to undermine the segmented pricing structure
• Segmented price structure


  One that causes revenues to vary with differences in the economic value that customers receive and the incremental cost to serve them

  
• Mechanisms to maintain a segmented price structure

  • Price-offer configuration
  • Price metrics
  • Price fences

  
• Price-offer configuration


  Segmenting the market by configuring different offers for different segments
• Offer design to implement segmented pricing requires minimal enforcement of the segments because customers self-select the offers that determine their prices
• Bundling features and services into packages reduces transactions costs for both customers and sellers, and people are less sensitive to the cost of value-added features and services when bundled
• Bundling


  Pricing a bundle of features and services as a single expenditure, rather than pricing them separately
• Bundling is profit enhancing when it is possible to bundle features and services that create high value for some significant customer segments but more moderate value for another
• Bundling can facilitate more profitable, value-based pricing to each segment when the most profitable price level for different segments is not the same
• Bundling of musical performances


  • Headline performers ($60 per ticket)
  • Innovative performers ($25 per ticket)
  • Bundle of headline and innovative performances ($80)
• Maximizing contribution from bundling often requires building a spreadsheet or employing complex optimization models to evaluate bundling alternatives
• Profitability


  When different customer segments have different price sensitivity for a "core" product or service
• Bundling


  • Finding features or services that one segment values highly and another does not
  • Designing segment-specific pricing
• Bundling value-added features and services


  • Attracts customer segments that require a lower price to win their patronage
  • Their purchase volume may be profitable, especially during off-peak periods or economic downturns
• Selective uglification


  Adding a feature to the lower cost offer that kills value for the higher-priced segment without affecting the value to the discount segment
• Bundling can be a profit-enhancing strategy for segmentation, but it often has the opposite effect when variable cost services are bundled simply to differentiate an offering
• Unbundling


  • Strategically essential when facing intense competition
  • Can be done without upsetting customers by offering rebates for forgoing use
• Price metrics


  • The units to which the price is applied
  • Define the terms of exchange—what exactly will the buyer receive per unit of price paid
• Common categories of price metrics

  • Per unit
  • Per use
  • Per time spent consuming
  • Per person who consumes
  • Per amount of benefit received
• Price metrics are often adopted by default or tradition, leading to poor alignment with value

  
• Criteria for determining the most profitable price metrics

  • Tracks with differences in value across segments
  • Tracks with differences in the cost to serve across customer segments
  • Easy to implement without ambiguity
  • Makes pricing appear attractive compared to competitors
  • Aligns with how buyers experience the value in use

  
• Giving services for "free" attracts customers who are relatively higher users of them
• Adding charges for services, at least for those customers who are excessively costly to serve, enables companies to keep their core product prices competitive and avoid attracting a mix of customers who are costly to serve
• Profit-sharing or performance-based pricing are theoretically ideal but often end in rancorous debate about how profit or performance should be measured

  
• The better the alignment between the price metric and how buyers experience the value in use, the more attractive the offer

  
• Price metric


  How the customer pays for a product or service and how it ties to the economic value received and the incremental cost to serve
• An ideal price metric would tie what the customer pays for a product or service directly to the economic value received and the incremental cost to serve