G3 FENCES FOR PRICE SEGMENTATION Presentation.pptx

Price segmentation

1. GROUP 3 Tiffany FENCES FOR PRICE SEGMENTATION Jeson Janice Abegial Pricing Strategy 2025 FEBUARY 16 Judelyn Kent

2. FENCES FOR PRICE SEGMENTATION Companies may charge varying prices for the same product based on factors like the quantity purchased or the time of purchase. This is influenced by the presence of different market segments. Different prices for the same product The pricing of various products sold by a company should consider the relationships between those products. Interrelationships between prices of different products GROUP 3

3. Market segmentation and pricing THE KEY CONCEPTS ARE: MARKET DEFINITION MARKET HETEROGENEITY MARKET SEGMENTS INDIVIDUAL PLACEMENT IN MULTIPLE SEGMENTS GROUP 3

4. Three factors that cause pricing differences between market segments A product might have a higher VTC for customers in one segment than another. 1. Product's Value to the Customer (VTC) 2. Costs to the Seller Serving one market segment may involve greater costs than serving another. 3. Customers' Price Sensitivity One market segment may be more price-sensitive than another. GROUP 3

5. Price segmentation in marketing THE PROBLEM THE SOLUTION GROUP 3

6. Challenges and strategies involved in implementing price segmentation in marketing. Difficulty of Voluntary Identification Customers rarely self-identify as willing to pay higher prices, making direct price segmentation difficult. Arbitrage as a Key Problem Arbitrage undermines price segmentation because customers in low-price segments could resell to those in high-price segments, negating the price difference. Price-Segmentation Fences To overcome these difficulties, "fences" are needed to separate high-price segments from low-price segments. These fences prevent arbitrage. 1 2 3 GROUP 3

7. Types of Fences Customer characteristics Purchase quantity Design of product bundles Product features Time of purchase or use Place of purchase Six major types of fences are listed: GROUP 3

8. Fence Design Goals Divide the market, separating high-price customers from low-price customers. Minimize the ability of arbitrageurs to cross the fence (buy low, sell high). Effective fences must: GROUP 3

9. HOW OBSERVABLE CUSTOMER CHARACTERISTICS CAN BE USED AS PRICE-SEGMENTATION FENCES CUSTOMER CHARACTERISTIC TIFFANY CUYOS

10. CUSTOMER CHARACTERISTIC Businesses often offer lower prices to children and seniors. The logic is that children have less disposable income and may not fully appreciate the value, while seniors may have fixed incomes and lower valuations of certain products. AGE Students often receive discounts on entertainment, travel, and merchandise because they typically have limited spending money. STUDENT STATUS Businesses or large organizations may be charged higher prices than individual consumers for the same product. COMMERCIAL STATUS IT USES SEVERAL EXAMPLES:

11. Perceived Unfairness Constraints on using customer characteristics for price segmentation. Legal and Ethical Concerns Acceptable Characteristics Context Matters Negotiated Prices

12. PURCHASE QUANTITY using observable customer characteristics for price segmentation can raise fairness issues, this approach focuses on purchase behavior instead. JESON & ABEGAIL ENCARNADO

13. Several methods for implementing quantity discounts are listed: Order-size discount Lower per-unit prices for larger single orders. Cumulative-purchase discount Lower prices for repeat customers who have made many purchases. Fixed-charge pricing Customers pay a single upfront fee (like a membership or annual fee) which grants access to the product at a lower per-unit price. Two-part pricing This involves a fixed charge plus a per-unit charge.

14. Why offering lower per-unit prices to buyers of larger quantities is often profitable. It focuses on three factors that determine the best price for a market segment: product value to the customer (VTC), costs to the seller, and customer price sensitivity. Diminishing Marginal Utility Reasons for Lower Prices with Larger Quantities: Diminishing Marginal VTC Lower Costs Increased Price Sensitivity

15. Constraints on using purchase quantity for price segmentation and the measures needed to prevent arbitrage. Arbitrage Key Constraints and Solutions: Segmentation-Fence Patches Legality Quantity discounts must be modest enough to prevent arbitrage—the practice of buying at a low price and reselling at a higher price. These are policies designed to address loopholes in the quantity discount system that could allow high-price customers to access low prices. The Robinson-Patman Act (1936) in the U.S. makes it illegal to discriminate in price between different purchasers of commodities of like grade and quality.

16. Exceptions The Robinson-Patman Act allows for price differences if: 1. They reflect differences in the costs of serving the customers. 2. They are done to meet competition.

17. DESIGN OF PRODUCT BUNDLES How the design of product bundles can be used for price segmentation. JANICE DALID

18. KEY CONCEPTS: Bundle Definition A bundle is any set of products offered together as a package. Careful Bundle Design If the products included in a bundle are carefully chosen, the bundle can achieve price segmentation even if all customers buy the bundle. Stigler's Framework One approach to designing effective bundles for price segmentation is based on a framework developed by Nobel Prize-winning economist George Stigler.

19. AGGREGATION BUNDLING a method of designing product bundles to achieve price segmentation. If sold separately, the maximum revenue would be $150 ($50 + $100). However, by bundling the products at $175, the seller receives: From Segment 1: $175 (they value the bundle higher than the sum of individual prices). From Segment 2: $175 (they value the bundle higher than the sum of individual prices). This $175 bundle price allows the seller to capture $25 more in revenue than selling the products separately, demonstrating successful price segmentation. Each segment pays a different effective price for each product within the bundle.

20. HOW TO DESIGN PRODUCT BUNDLES TO ACHIEVE PRICE SEGMENTATION. Key Idea: By bundling products that have a VTC crossover, the seller can create a package that appeals to multiple segments, each for different reasons. The overall bundle price can be set to maximize revenue across segments.

21. HOW TO DESIGN PRODUCT BUNDLES TO ACHIEVE PRICE SEGMENTATION. Examples: Cable TV Package: A bundle containing Disney Channel, History Channel, and NFL Network would appeal to young people, history buffs, and sports fans, even though each segment values the channels differently. Fine-Dining Restaurant: A standard dinner package (soup, salad, entrée, dessert) appeals to different diners who value different aspects of the meal. High-Performance Computer: A computer workstation and a support contract are bundled. Companies needing the computer's capabilities value it highly but may need less support.

22. PRODUCT FEATURES How product features can be used as a price-segmentation fence. JUDELYN ERANGA

23. PRODUCT FEATURES Key Concept: The choice of feature becomes the price-segmentation fence. Customers who value the additional feature pay a higher price for the basic product plus the feature, while those who don't value the feature pay only for the basic product.

24. Example: A basic product is valued at $10, and an optional enhancing feature is valued at $2. Two market segments exist: Segment 1: Values the basic product at $10 and the optional feature at $0. Segment 2: Values the basic product at $12 and the optional feature at $2. Without price segmentation, the basic product would sell for $10, and the product with the feature would sell for $12. With price segmentation, the seller can charge $10 for the basic product and $4 for the optional feature. This strategy increases the likelihood that customers in Segment 2 will purchase the product with the feature, because their total VTC is $14 ($10 + $4). This is a $2 premium over what Segment 1 pays for the same basic product.

25. How to use product-enhancing features for price segmentation. The strategy involves adding a feature that significantly increases the value for a specific customer segment but has little to no impact on other segments. This allows the seller to charge a higher price for the basic product to that segment without losing sales to the less-sensitive segments. Identify a feature that enhances the product's value for a high-VTC segment but doesn't significantly impact the VTC for other segments. This feature then becomes the price-segmentation fence, allowing for a higher price to be charged to the high-VTC segment. Key Idea:

26. Example: The cartoon shows Ruthie selling artwork. By adding a "cute smile" (a product-enhancing feature), she can charge a higher price to customers who value this feature. Ruthie's Artwork:

27. How to use product-diminishing features for price segmentation. The strategy is to offer a basic product at a lower price to a segment that values the product less. Identify a feature that reduces the value of the product for the high-VTC segment but is either neutral or positive for the low-VTC segment. Alcohol: High-quality distilled alcohol for drinking is expensive. Lower-quality alcohol (with additives to make it undrinkable for consumption) is sold at a lower price for medical or industrial uses. The choice of alcohol with or without additives becomes the price-segmentation fence. Air Travel: Airlines offer lower fares for Saturday-night stayovers. Business travelers (high-VTC) usually want to return home on the weekend, so the Saturday stayover diminishes the value for them. Leisure travelers (low-VTC) often prefer to travel over a weekend, so the stayover is not a negative. The choice of including or excluding the Saturday-night stayover becomes the price-segmentation fence.

28. how the Washington National Opera used a combination of product-enhancing and product-diminishing features to increase revenue through price segmentation. The opera initially had three ticket price levels. To increase revenue, they employed a two-pronged approach: The Strategy: 1. Product-Enhancing Features (High-Price Segment): They identified strong opera enthusiasts willing to pay more than the highest existing price. They used product-enhancing features (center front-row seats) to appeal to this segment, raising the price of these seats to $150. These seats sold quickly. 2. Product-Diminishing Features (Low-Price Segment): They identified a segment of occasional opera-goers (students, homemakers, seniors) who would attend if prices were low enough. They used product-diminishing features (seats in corners or upper balconies) to create a lower-priced option ($29), attracting many new attendees. Result: By using both strategies, the opera substantially increased its revenue without raising prices for most tickets. This demonstrates the power of combining product-enhancing and product-diminishing features for effective price segmentation.

29. GROUP 3 CHOOSING A PRICE-SEGMENTATION FENCE AND EMPHASIZES THAT COMPANIES CAN USE MULTIPLE FENCES TO EFFECTIVELY SEPARATE CUSTOMER SEGMENTS.

30. Key Points: Due to customer perceptions of price fairness, it's crucial to use price-segmentation fences that don't rely on customer characteristics. Fairness Concerns: Purchase-situation characteristics such as quantity purchased, choice of product features, and carefully designed bundles are effective fences. These can create scenarios where different customer groups pay different prices for essentially the same product. Effective Fences: GROUP 3

31. Multiple Fences: A company's price structure may use more than one fence. Importance of Understanding: 1. A men's clothing retailer offering discounts to seniors and high-quantity buyers. 4 Examples include: 2. A retailer charging feature-dependent premiums for services (monogramming). 3. A symphony orchestra using student discounts and feature-dependent discounts for less desirable seats. Understanding price segmentation is key to maximizing a firm's profits. It's rare for a company not to benefit from this pricing technique GROUP 3

32. QUESTIONS?

33. FIN!