Price Segmentation

Segmentation is the process of dividing the market into groups of customers or consumers with similar needs. The more closely the needs match up, the smaller the segment tends to be, but the higher the premium customers are likely to be prepared to pay to have a product that more exactly meets their needs. Price segmentation is simply charging different prices to different people for the same or similar product or service.

Understanding how the consumer thinks can also help companies to position or repositioning their products on the market. Psychographics can help to improve products so that they better suite the needs of the consumers and that the price is set good on a market.

In customer-based price segmentation, the firm selects which prices the customer will pay based on their observable characteristics. In product-based price segmentation, the customer decides what price they will pay based on the product’s observable characteristics.

Price segmentation is common and widely practiced. Variation in household incomes creates an opportunity for segmenting some markets along a price dimension. If personal incomes range from low to high, the reasoning goes, then a company should offer some cheap products, some medium-priced ones, and some expensive ones.

Price elasticities are useful for identifying service segments because repeat purchases, rather than trial purchases, dominate sales of existing services. In their repeat purchases, customers trade off the expected benefits of the service (which they have previously experienced) for the price. Therefore, price elasticities should be particularly useful for market segmentation.

Price Segmentation