The right fences help customers understand and accept price differences
What Are Segmentation Fences
The idea behind price differentiation is that each customer has a distinct willingness to pay. The seller is then able to utilize that information to design a pricing structure that presents a unique pricing to each customer segment, thereby maximizing the number of customers and the profit from each segment.
However, a great concern that companies have when developing price differentiation strategies is that customers will realize that others are paying less for the same service, and that will generate anger, resentment and a loss of trust.
The solution to this problem is to develop segmentation fences, which are symbolic barriers erected to explain and justify the different pricing.
Senior or student discounts, for example, constitute examples of segmentation fences common in business-to-consumer markets. They allow for the seller to provide the same product for a customer with less discretionary income at a lower price. And given the ubiquity of these discounts, there is little to no resentment by other customers.
In business-to-business markets, though, there are two primary approaches to create a segmentation fences:
Justify Based On Existing Differences
Modify The Offer
The first approach is to identify preexisting differences between each segment, and take advantage of that to justify the differentiated pricing.
For example, if a technology provider identifies that the level of integration required by one industry is greater than others, and that matches the higher willingness to pay as well, then this difference can be utilized to explain a higher price point for that industry.
Similarly, if a certain segment requires more training, or demands a higher level of service, that can be a reason to demand a higher price point from that segment, especially if a conjoint analysis validates a higher willingness to pay by that segment.
Modifying the Offer
Another alternative is to simply modify the offer to each segment, so those segments that are less price-sensitive can receive a more robust product and service that justifies the price difference.
This differentiation can be accomplished by adding or subtracting features and components of the product in question. Alternatively, the service aspects such as customer support, maintenance and warranty can be quantified and modified to support multiple price points.
Lastly, quantity or usage levels can also be used to create different pricing tiers, either as a discount for greater usage, in case the larger customers are more price-sensitive, or to justify a higher-price, if the larger customers are more costly for the seller to service.
Safe and Profitable
Given the many alternatives, we see that segmentation fences allow for a company to offer differentiated pricing effectively and safely, thereby increasing profits while avoiding any potential backlash.
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