How can retailers use price segmentation to increase profits?

Using Price Segmentation For Profit

Econ 101 teaches us that the market price of any good is what the customer is willing to pay.

But what is the customer willing to pay, anyway? That depends entirely on the customer.

In general, no two people who walk into the same retail establishment will have the same annual income or the same spending budget. They will not necessarily place high value on the same products. So it is clear to any retailer looking to maximize sales and profits that customers should be offered a variety of price points for the same category or type of product. Perhaps it is as simple as charging a higher price for a premium brand and a lower price for a budget brand. Or, it could be charging two different prices for the exact same product in one Store Segment or Banner vs. another, depending on the income levels and demographics of the core customer.

The solution to this problem? Price segmentation.

Let's Make a Deal
Simply put, price segmentation is the act of charging consumers different prices for the same products, regardless of the cost of production or distribution. Often, retailers will use price segmentation to attract potential customers who may not have been able to afford certain goods at full price. Think discounted movie tickets for children and senior citizens, or sales for frequent buyers. Sometimes, retailers will attempt to extract greater revenues from high-spending customers. Consider the way that airlines charge higher prices for certain tickets. Finally, price segmentation can be used to reward a business's most loyal customers. Amazon does this with its Prime program, offering subscribers lower prices and free shipping on certain items.

"Price segmentation can be used to reward a business's most loyal customers."

Price segmentation should not be confused with price gouging, which is the act of charging an exorbitant price for an in-demand good that the consumer has no choice but to pay. Used properly, price segmentation can actually win over customers by offering them something that they value. 

Setting a Price for Every Customer
The manner of price segmentation that you choose for specific product categories in your business depends on the type of customers that you are trying to reach. Here are some examples:

  • The Bargain Hunter: These shoppers tend to have the lowest disposable incomes, and are therefore highly conscious of their spending. They are looking for the cheapest possible price, which means they will seek out sales and generic, store-brand items that can be sold at a lower price. 
  • The Value Shopper: These people are similar to Bargain Hunters, in that they are often looking for the best price. However, even more than that they are seeking the best value for their money. This doesn't always mean the cheapest item. A bulk size could be more appealing to Value Shoppers, as could a two-for-one deal.
  • The Status Seeker: Price is not a concern for these shoppers. They tend to have high incomes, and are more concerned with quality goods that suggest high status. These are the customers that can be targeted with premium brands.

Maximize Your Profits
It's difficult to make a price segmentation plan work without sales data to back it up. Retailers need to figure out which items are their top sellers, which brands command the highest loyalty, and whether there are any correlations between sales of different types of items.

For instance, if it appears that customers tend to purchase two different items at the same time, they may respond positively to a discount for buying them together. In addition, look for items that many customers are buying in bulk. They may appreciate an extra discount for future large-scale purchases, or perhaps a lower-cost store brand alternative.

Collecting this data can be difficult. Retailers need a system that can collect all of this relevant, impactful data and organize it in such a way that can deliver actionable insights. Interactive Edge offers a number of creative ways to get the most out of your data. Check out the rest of our website to learn more about the services we offer to our clients.