There are no shortcuts to pricing. The total economic value of a differentiated product is proportional to its technical efficiency (e.g. 'x % better, faster' etc) only when buying more of the product has more benefits. 

!!Value based market segmentation
A lot of companies ''//segment their company along attributes that are not relevant to pricing decisions//''. Charging an arbitrarily segmented market the same price will underprice certain customers and overprice other customer leaving. A few points:
* Most segmentation criteria poorly reflect price sensitivity
* Even 'need based' segmentation criteria focus on those needs that are deemed important by the customer. They miss the criteria that would have the biggest operational impact on the customer and the sellers cost to serve those needs.
* In depth interviews will reveal why customers find certain benefits appealing.

!!Six steps to value based segmentation
Nagel et all recommend a six step value based segmentation strategy:
# Determine basic segmentation criteria
## Choose criteria that determine customers buying behaviors
## Obvious criteria (link to existing MBI ones)
## Enterprise firmographics (#employees, revenue, etc, geography)
## Outputs include sketch of basic needs, list of unmet needs, buying behaviors
## Check draft segmentation with sales people and managers.
# Identify discriminating value drivers
## Focus on purchasing behaviors
## Identify the drivers that differ most between segments and are homogenous within a segment
## What are the customers revenue and cost improving drivers?
# Determine your own operational constraints and advantages
## Look at your own strengths to serve the difference customers segments
## Consider [[Activity based costing]] to get a clear view on what each segment costs to serve
## Build a customer behavior spectrum mapping your true cost to serve each customer
## Look at thinks like need for service, time decide, frequency of buying etc.
# Create primary and secondary segments
## Dive a bit deeper in identifying axes of segmentation but no use going too far with this
## The primary segment should account for your companies capabilities as well as your customers need.
## The most important criterium is likely to be the most important differentiator among customers: the one with the most operational impact.
## Your secondary segmentation criterium will be the one for which the primary segment differs most
# Create detailed segment descriptions
## Make sure that everyone understands your segments very well
## This will help communication of your segmentation in the organization
# Develop segment metrics and [[Fences]]
## Fences are policies, rules, agreements that customers (sales...) need to follow

!!Price Structure
After segmenting the market and 'creating value' the next step is to identify a pricing structure to optimizes the company profitability both in volume and in margin. The challenge is that customers value offerings different in terms of willingness and ability to pay, different preference and different intended uses.
Pricing strategies therefore need to be specific per market segment. Market segmentations are sometimes difficult too maintain as customers have an incentive to try to qualify for the criteria of the 'cheaper' segment. Also distributors can undermine your pricing strategy by buying from you at the lower price point but sell the item to a customer would actually belong to the higher priced segment.

Willingness to pay different prices in different segments justify different go to market strategy. The amount of segments depends on the following factors:
* Price offer configurations
* Price Metrics
* Price fences

!!!Price offer configurations
Depending on how different segmentations value certain features and services, optimally configured offerings for each targeted segment can be created. There are multiple arguments in favor of bundling and against pricing each item separately:
* A single bundle reduces the cost of the transaction for both parties
* The cost of creating combinations of each offering increase with the variations allowed
* People are less sensitive to the cost of value added service when bundled
* Sellers can earn more profit with bundles that are highly appealing to certain customer segments but less to others.
** The following table illustrates this. Music lovers value 'top artist' and 'new performers' the same. Entertainment seekers want to pay premium for the top artists but are not too keen on the new performers. Pricing a must see concert at $60 would leave out the music lovers as well as pricing the new discovery at $25 would leave out the entertainment seekers. Pricing a must see at at $40 and new discovery at $25 would get both groups in by a lot of potential value is left to the table. Both groups would be prepared to pay $80 for both concerts and both for different reasons.
* Bundling can also have advantages when a certain customer segment has a high price sensitivity to one of the features of the offered product or service.

Bundling in 'negative' features can also be profitable: an example of this is the mandatory 'Saturday night' stay that keep out most business customers but attract pleasure travelers for the discount.

If bundling includes variable cost products or services for free it can have a negative effect on profitability. This problem is most prominent when there is a great difference in consumption for each customer and therefore the costs of certain customers can be very high.
Price metrics
Price fences
!!!Difference in value of an offering
The following are causes in the perceive value of an offering:
* Differences in valuation of the features offered
* Differences in valuation of the services offered

Examples of bundling and unbundling features
* Airlines offering seats cheaper depending on the feature to cancel the flight or change routes
bag
marketing_public
created
Sun, 04 Dec 2011 20:15:14 GMT
creator
dirkjan
modified
Sun, 04 Dec 2011 20:15:14 GMT
modifier
dirkjan
tags
Model
The Strategy and Tactics of pricing
creator
dirkjan