In July, the University of Pennsylvania announced the offering of online degrees in Masters and Bachelors programs, which are designed to appeal to price-sensitive students. Last month, Forbes Magazine published an article skeptical of Penn’s new offering, University Of Pennsylvania’s Louis Vuitton Problem. The Forbes article concluded that the online programs are really an experiment that is at risk due to the history of luxury brands damaging themselves by trying to appeal to more buyers. I agree it is an experiment; but unlike Forbes, I believe Penn will demonstrate that by keeping enough high-value features exclusive to the premium product, lesser-scoped products can be sold while protecting the brand’s image.
Five, five, five-dollar footlong. Who doesn’t remember that jingle? During the last recession, Subway announced their promotion for footlong subs priced at $5.00. Now, nearly 10 years after they introduced it, Subway has ended $5.00 pricing on the big sandwiches. It is about time! It is also a good reminder that although we want pricing strategies to be durable, individual prices should change with circumstances.
I am often asked where a client can lower prices to get more volume. Typically, they want to know which segments or customers are buying elsewhere and would switch to our client if offered lower prices. It seems like a simple question, but the answer is rarely simple and often frustrating to our clients. Our view is if you care about profitability, lowering prices to chase volume is often a bad pricing strategy.
Two weeks ago I wrote a blog post, Don’t Get Angry About Prices– Change Your Buying Behavior, in which I opined getting angry about pricing accomplishes nothing. Shortly thereafter, I read an article in the Washington Post, Do Airline Tickets Need Warning Labels?, followed by JetBlue and United raising their baggage fees. Meanwhile Southwest still doesn’t charge for checked bags. These things all reiterated my view that companies should compete by differentiating themselves in whichever way they believe adds the most customer value, including transparent pricing or multi-part pricing. Read more
This past week I had two buyer experiences with interesting examples of segmentation, although the sellers may not have realized they were segmenting their customers. The two situations resulted in different outcomes and provided some good lessons. The most important lesson is that segmentation should enable you to expand your customer base, sell more products or services, and improve your profitability. If those are not the results you are obtaining, you are doing it wrong.
Customer segmentation is a simple concept – identify groups of customers who tend to have similar levels of price sensitivity and set distinct prices for each group. Unfortunately, many companies either think all their customers are the same, or they don’t have enough information to create segments. In particular, we often see this in retail businesses. Unfortunately, assuming all customers are the same results in missed profit opportunities. With a little creative thinking, it is possible to let customers segment themselves and capture more profit.
Last week I read an article in the Wall Street Journal, The Secret Other Reason Basic Economy Is Everywhere. In the article, the writer seemed to imply airlines are doing something shady to force businesses to pay higher prices. In reality, the airlines are using smart segmentation techniques. They are simply finding combinations of features that are valued by some groups more than others; and they are matching them with price sensitivity of the groups.
We are occasionally asked by clients or prospective clients to help them simplify their pricing. These requests are usually the result of the company struggling to manage the myriad prices they offer, but also often include a desire to make it easier to engage customers, or a desire to improve the margins on the lowest priced customers. In all cases, the companies want their overall profitability to improve. Unfortunately simplifying pricing is often not a good idea and can lower a company’s profits.
Many of us make New Year’s resolutions with great intentions, but perhaps miss carrying out some of them. Even if you made great progress this year, we hope you will join us in making and sticking to these resolutions. This is our fifth annual publishing of New Year’s Resolutions for Pricing
All companies want to grow. The tough question is how to do it profitably and sustainably. A common approach for many manufacturers is to expand the number of channels through which their products are available to reach customers who otherwise might not try them. However, if that is not done with a proper understanding of segmentation (which customer segments buy in which channels), growth can be fleeting and potentially profit-killing in the long term.