Price Segmentation: Learn About One of the Most Powerful Pricing Strategies
Price segmentation is one of the strongest strategies you can use when setting up pricing for your products or services. Companies of all sizes can apply price segmentation to create a more efficient and results-driven pricing strategy.
In short, price segmentation is charging a different price to different market segments. A common example would be charging kids less for a movie ticket or senior citizens getting lower fares for public transportation.
Although virtually every brand has the chance to employ segmented pricing, many don't know exactly how to implement it effectively. However, unlocking the potential of price segmentation can mean the difference between steady growth and stagnation.
If you're a small business, retailer, software company, restaurant, entertainer, or any other company that markets to different demographics, continue reading to learn how to use price segmentation.
What Is Price Segmentation?
Price segmentation is a pricing strategy used by various companies across virtually every industry to increase revenue and profits. Businesses that deal with high fixed costs can benefit significantly by charging different prices based on different market segments.
The best way to implement price segmentation is to identify the needs of your different customers and segment your prices accordingly.
A great example of this would be student tickets at a movie theater on weekdays to drum up sales when movie theaters are typically slow. For a SaaS business, it could be something as simple as offering different prices (and features) to non-profit organizations.
There are numerous ways price segmentation can work, and understanding each type is vital for success. If done right, price segmentation can be an excellent tool to scale your company and keep your customer base happy.
Why Is Price Segmentation Important?
Price segmentation is crucial because it can help you boost profitability and lifetime value from certain customers while still closing customers with lower spending power, boosting your overall revenue.
Let’s explore what the advantages of price segmentation look like in the long run.
1. Increased Profits
Several businesses have room to increase prices and generate more revenue. Business owners tend to focus more on their brand and not enough on their financials. However, increasing profits is easier said than done.
Introducing price segmentation to your company could be exactly what you need to make sure you're generating enough profit for steady growth. You can guarantee that the customer's willingness to pay stays high with all your products.
In the image above, you can see this clearly on display. Your costs, highlighted in red, are the same for each customer group. While the first three groups are generating profit from a single pricing model, groups four or five would potentially offer less profit. By offering price segmentation, you can capitalize on customer groups willing (and able) to pay more than the fixed-price you currently offer with a single pricing model.
Plus, even if some customers downgrade rather than upgrade, you can keep your margins high by limiting the service or features available to lower-tier customers.
If your company is stagnant due to fixed costs, charging different segments of your market more or less can help break the barrier. As long as you implement price segmentation properly, you can generate more profit without upsetting your customers. For example, Nike offers running shoes in a wide range of prices, starting at $50 and going to over $300.
Introducing price segmentation has been shown to increase operating profits by between 10% and 60%.
2. Increased Market Share
Offering attractive prices to a specific demographic is an excellent way to enter an untapped market.
As an example, the streaming company Netflix utilizes price segmentation on a global scale. In the United States, where people can afford a more premium service, prices range from $9.99 to $19.99 per month. Meanwhile, in India, where the economy isn’t as strong, prices start at $1.88 and go up to $8.20 per month.
Price segmentation, when done right, not only brings more people to your business, but it also doesn’t create resentment among customers. Instead, you can make each customer feel like they get exactly the product they need (and can afford) and generate long-term loyalty.
3. Flexible Marketing Strategies
It can be challenging to make your brand stand out, especially if you're in a competitive industry. That said, price segmentation gives you more flexibility when marketing your business. Segmenting the market allows you to develop different marketing strategies and unique selling points to attract the right customers.
When you have multiple market segments, your marketing team has a lot to play with regarding what kind of message they want to convey. Moreover, you can create multiple marketing campaigns across numerous channels to target each segment of your market.
4. Higher Growth Potential
Running a business is challenging on its own, but scaling a business is an entirely different animal. But growing your company is much easier using a price segmentation strategy. Segmented pricing can help companies with stagnated revenues and profits due to fixed costs and prices.
By offering different prices based on market segments, your company can generate more profit without investing time or money in developing new products or campaigns.
For example, a gym can offer group classes instead of one-on-one training sessions. The lower price point can attract people who can’t afford a 1-on-1 with a personal trainer. And on the other hand, trainers can train multiple people at once in roughly the same amount of time while generating more revenue for the gym. This type of win-win is part of a good price segmentation strategy and is the main reason it fuels growth.
5. Ability to Help Others
Although making more money is the most apparent benefit of price segmentation, it's not the only reason it's a fantastic tool. By segmenting your market, you can offer better prices for a certain demographic.
You can help your community by allowing people to use your services at a lower cost or with additional support.
Implementing a price segmentation strategy properly will be extremely beneficial for you, your team, and your customers. It's a surefire way to scale your business with minimal friction and create a bigger impact on your community.
Common Examples of Price Segmentation in the SaaS Industry
Next up, let’s take a look at a few examples of how price segmentation is applied in the SaaS industry.
1. Adobe
Adobe is a creative software company with an entire suite of services, including Photoshop, Premiere, Acrobat, After Effects, and many more, as part of its Adobe Creative Cloud.
As an individual, these services bundled together aren’t cheap. You can get the entire Creative Cloud package for a monthly subscription price of $54.99.
For businesses, the price goes up even further, costing $84.99 per month per license.
But that’s not where the price segmentation of this software solution ends. There’s also special lower pricing for teachers and students. They can get all 20+ apps in the Creative Cloud for just $19.99 per month.
There’s no difference in the software based on who is using it. The Photoshop a student would use is the same in a corporate office. But because of price segmentation, Adobe’s product is rolled out to a larger audience.
What’s more, by making it affordable for students, Adobe ensures that the next generation of creators are trained on its platform, ensuring that they’ll continue using these products after they graduate and enter the creative field.
2. Microsoft 365
Microsoft and its popular Microsoft 365 suite of online services (formerly known as Microsoft Office) includes Microsoft Word, Publisher, PowerPoint, Excel, Teams, and more.
The company charges between $69.99 and $99.99 per year for at-home use.
The same software takes on a per-user SaaS pricing model for a business, as seen in the image below.
Now, here’s where it gets interesting. Students and teachers get a discount that’s not just huge; it’s absolute.
Microsoft offers its suite of services to teachers and students for free.
It even allows schools to have students install the service on up to five Macs or PCs at no cost.
This is not only great PR for Microsoft, but much like Adobe, it ensures that students learn how to use Microsoft’s platform while still in school. Once they’re used to it after graduation, the hope is that they will continue to use it.
Additionally, businesses will continue to purchase Microsoft 365 since most new graduates entering the workforce would already be trained on it.
3. Rosetta Stone
Rosetta Stone is one of the world's largest language learning software companies. It lays down some fairly standard pricing for individual use, as shown in the image below.
This is the pricing for an individual to learn Mandarin Chinese. As you can see in the top menu, the company also has special prices for schools and enterprises, but it doesn’t make those publicly available.
It also has special pricing available for military members, which it verifies through the ID.me system. Again, this is great PR for the company, and also helps the product reach a new market.
Military personnel often need to learn foreign languages to communicate on lengthy deployments, so Rosetta Stone makes its service more available for active duty and retired military members.
While the company doesn’t list the actual discount amount on its website, military.com has it listed as 10% off of normal pricing.
Types of Pricing Segmentation
Now let’s take a look at how you can facilitate the different prices for your products or services.
1. Customer Demographic
Price segmentation by customer characteristics like age, occupation, geographic location, and more can be a common strategy. You see it everywhere, from sports stadiums and pubs to restaurants, theme parks, and public transportation. It’s even prevalent in SaaS products.
The popular bookkeeping software Quickbooks segments some offerings by demographic. In this case, it does so by occupation.
Above, you’ll see plans for businesses separated by tiered pricing. But when you scroll to the bottom of the page, you’ll find a special offering solely for self-employed individuals like freelancers and independent contractors.
Freelancers and independent contractors are a target demographic for Quickbooks. While they’re not the company’s most profitable demo, they represent a huge and growing market, and thus an important part of the SaaS company’s business model. Charging a self-employed person the full price for the full suite of services offered by Quickbooks isn’t realistic, as most freelancers can’t afford a $480 annual subscription just to do their bookkeeping.
Some other examples of this pricing segmentation model at play would be Cracker Barrel rolling out discounts for senior citizens or Walt Disney World releasing lower-priced park tickets and room reservations for Florida residents.
2. Product Bundling
Product bundling is pretty straightforward. It's where you bundle various products together and sell them as one package. It's a simple price segmentation strategy that incentivizes people to purchase more products at once.
Fast food restaurants do it all the time with their value meals and combos. You can bundle the products together for a slightly lower rate than buying the products separately and move more units as a result.
It’s also a common strategy for SaaS companies, where an enterprise bundle might include a chatbot, help desk, and more instead of just a single service. In the last section, we talked about Adobe and its pricing segmentation. It also uses product bundling to increase the value of the average customer.
All the services marked in purple are individual apps or, in the case of the first one, a collection of two apps bundled together. Photoshop alone is $20.99, but you can get all of these services plus over 15 more apps for $54.99 when you purchase the entire bundle.
Not only does this increase the value of each order, but it also strengthens your customer relationships as they rely on you for a variety of tasks which increases the switching costs drastically.
3. Product Form Pricing
Product form pricing is where you charge a certain price based on the different versions of a product. A common price segmentation example in this category would be selling the same car but in a different color. If the stock color is white, a customer will have to pay more for theirs to be platinum or gold.
Product form pricing can be an amazing price segmentation strategy because it gives your customers more options to choose from. You can also market your products slightly differently to generate more revenue from a certain version of your product.
In the SaaS world, many software solutions use product form pricing by creating tiered memberships with additional features and services for a higher price.
In the above example, monday.com has five different tiers, ranging from a completely free individual plan up to a custom enterprise plan. Each of these tiers sees a bump in the per-seat price while adding more features in other words, changing the “product form.”
4. Usage-Based Pricing
The ultimate form of price segmentation is making sure each customer only pays for the resources they actually use. With usage-based billing, a SaaS company can charge based on the number of users, emails sent, gigabytes of storage used, or any number of value metrics.
The search and discovery platform Algolia makes great use of usage-based pricing, as evident in the image below.
Algolia’s two paid plans charge users per 1,000 requests made through the platform. That means if you’re only processing 10,000 requests on the search platform, you’re only paying $15 for the month. But if a company processes 100,000 requests in a month, it’s paying $150. This pricing segmentation strategy can give clients more ownership over the service they’re investing in, and makes it easier to justify the investment as they’re only paying for what they use.
5. Channel-Based Pricing
Channel-based pricing is a price segmentation strategy that entails charging different prices based on the channel you're selling your products. Companies can sell products online cheaper than in their storefront because they don't need to account for the high fixed costs of operating a physical location.
If you're a retailer or brick-and-mortar business, channel-based pricing can be an excellent way to generate more profit and scale. You can essentially offer similar products but with fewer expenses. The profit margins on your products would increase, and so would your ability to grow.
6. Purchase Volume
Purchase volume is one of the most common forms of price segmentation. The more units someone buys, the less they should expect to pay per unit. This is common practice for any business that sells wholesale goods.
Gyms also do this with long-term memberships. The monthly fee to workout might be $30, but the yearly package could come out to be just $300.
If you're selling a product, you should always have a discounted price for people buying in bulk. It'll incentivize people to make larger orders. The same goes if you're offering services.
7. Condition
You see a lot of condition-based pricing in the transportation and travel industry. For instance, trains might charge passengers more for a refundable ticket. The airline industry typically offers first-class options for customers willing to pay more. In the world of SaaS, you might pay more for 24/7 customer support or guaranteed response times for technical service.
Depending on the conditions of your agreement, you can make adjustments to your prices seamlessly. Other customers won't be upset because they still have the option to pay the standard price without the added benefits.
Consider adding conditions to your price segmentation strategy if you're a service-based business looking to place small upsells in your packages.
An example from a subscription pricing model would be a service like Hulu, the streaming platform.
The ad-supported version of Hulu is $6.99 per month, but you can pay extra for an ad-free experience at $12.99 per month. You give those that can afford it an option to upgrade their “conditions” but don’t leave out those who either can’t afford this or simply don’t want to.
8. Location
The closer your customers are to the action, the more you can charge. A nice example of this is concerts. If you want to be in the front row right near the performer, you can expect to pay a much higher price for a ticket than someone on the back lawn.
Uber also uses price segmentation by location with its surge pricing algorithm. People pay more than 1.5x the standard rate for a ride if they're in a high-demand area. While people don't like paying more for a ride, Uber can justify it due to the large need for rides in a given location.
9. Purchase Time
Fashion retailers and restaurants use a purchase time price segmentation strategy frequently. For the fashion industry, stores might charge more for outfits that are in season — or less for those that are out.
Bars and restaurants might have discounted food and drinks during happy hour. You can base your price segmentation strategy on when customers are purchasing to charge more or less for the same products.
Furthermore, you can use these discounts to get customers in the door during slow hours. You'd be surprised at how often people will jump at a deal when they see one.
But these are only a few examples of segmentation. You can segment your customers based on any number of geographic, demographic, psychographic, or behavioral factors.
Tips for Implementing Price Segmentation
By now, you should already understand the importance of price segmentation and how it can help you grow. However, how do you implement a price segmentation strategy the right way?
Here are some actionable tips to guarantee you're using the different types of price segmentation properly.
Identify Every Customer Segment
The first step is to identify your customer segments. The largest segments to start with are:
Demographic: Group your customers into groups based on age, location, or status (like student, veteran, retiree, etc.) so you can easily identify their purchasing behavior.
Volume: Identify which customers purchase in higher volume so you can market your products or services to fit their needs.
Time of Purchase: Determine when customers are buying your products and see if there's room to implement a price segmentation strategy.
Spending Power: How much can they afford to or want to spend on your products?
Unique Needs: Does any customer have needs — like guaranteed uptime — that you can’t offer all customers at the same price?
Identifying each market segment will make it easier to successfully implement a price segmentation strategy. These are the top three, but you can always dig deeper into your current customer base to create more segments.
Determine Extent of Willingness To Pay
Some segments of the market are willing to pay more than others. In that case, it's crucial that you tag these segments when creating your pricing structure.
But the willingness to pay comes with a unique context for each customer. That's why it's crucial that you research your target market to identify variables that might affect customer behavior.
Supply and demand is a classic example of determining a higher or lower willingness to pay. If someone has an urgent need for a product and there are no alternatives, they're willing to pay more.
There are several factors that contribute to a customer's willingness to pay. They are:
Health of the economy
Trendiness of a product or service
Personal budget
Circumstantial needs
Product rarity
Product quality
Since you’re not a mind reader, you’ll have to figure out what your various audience segments are willing to pay. This can be done through market and consumer research, taking a look at your industry as a whole. You can also run surveys directly or indirectly to determine what kind of value customers place on your products.
Gradually Implement Each Pricing Segment
One important thing to note when implementing a price segmentation strategy is to do so gradually. The last thing you want to do is increase your prices out of nowhere and drive customers away from your business.
Start by identifying a date in the future where you want your segmented pricing to be fully rolled out. Start bundling products together and slowly roll out new options over time. If you’re looking to roll our four new pricing tiers by this time next year, introduce one new segment per quarter. This will prevent your customers from being overly surprised or turned off by the sudden shift.
If you’re increasing prices, start slowly and increase the rate over time. Again, if your timeline is one year, do a slight increase in six months and then another at the one-year mark.
Some concrete strategies that we’ve already discussed like product bundling, product segmentation, or usage-based pricing can help you avoid any issues.
Track Results and Refine Your Strategy
Collecting data is vital if you want to have long-term success with price segmentation. Without data, you won't know exactly how customers are reacting to your new prices. Once you've implemented one or more of the different types of price segmentation, you can see which ones are working best.
Don't be afraid to refine your strategy if you feel your price segmentation strategy isn't working. You can always revert to your data to create newer groups of customers and change prices accordingly.
Implement your current ideas, then conduct monthly meetings with your team to see if your customer behavioral patterns are changing.
Best Practices When Implementing Price Segmentation
Want to avoid losing customers during the transition? There’s no point in restructuring and segmenting your pricing if you’re only going to drive away your most loyal customers. There’s a level of research and groundwork that’s needed to successfully make a change like this to an established business with existing customers.
By following these best practices for price segmentation, you can ease your audience into this change and convince them that it’s a good thing.
Manage Everything Carefully
If you're not careful when implementing price segmentation, you risk angering your customer base or being accused of price discrimination.
So only introduce different prices for market segments after proper research and careful consideration. If possible, you should set up a team including sales, product, customer service, and marketing to oversee the transition. That will ensure you have the resources to measure your success across the whole funnel.
Once you find the right price segmentation strategy, it becomes much easier to implement it across all your market segments.
Use Price Segmentation Tools
If you're not sure you can successfully implement price segmentation into your business model, modern billing platforms can help.
Platforms like Chargebee offer many price segmentation tools that can help you identify and organize different market segments quicker and more efficiently. You can automate billing and many tedious tasks with a platform that manages all your customer data.
Furthermore, a good price segmentation tool will help you become more scalable. That’s crucial for the future growth of your company.
Make Sure Everything Is Measurable
Without tracking real data, there's no way to conclude whether your price segmentation strategy is working. You need to identify metrics, set benchmarks, and continually track progress.
Having measurable data gives you the information you need to scale your price segmentation efforts. Once you see how the market reacts to your segmented prices, you can either double down or refine your new price segmentation strategy to generate more revenue and profits.
Measure the results of your price segmentation strategy continually for at least a year after the adjustment. Outline concrete metrics you will follow, like customer lifetime value, revenue growth rate, deal close rate, and more.
What Are the Risks of Using a Price Segmentation Strategy?
Rolling out a price segmentation strategy isn’t without risks. It’s not a slam dunk guaranteed to revolutionize your business for the better. Just like any other major shift in a company, there are risks that can seriously impact your bottom line, especially if your business is already established.
In this section, we’ll walk you through some possible risks of introducing price segmentation to give you a more complete view of what could happen if you choose to take this route.
Customers Feel Like They're Being Treated Unfairly
Some customers might feel like they're getting a raw deal if others are paying a lower price for a similar product. That's why you need to have clear and fair terms of how you’re segmenting prices.
On the other hand, some customers might feel bad if they notice someone is getting special treatment or a better experience — like with airlines. Even if the other segment is paying more, it's natural for customers to feel slightly upset.
You can avoid this by being mindful when implementing your price segmentation strategy. Understand each market segment and develop a fair pricing structure and custom products that match their needs.
Loss of Profits
While the primary purpose of a price segmentation strategy is to increase profits, it's possible to lose money if you don't implement it properly. If you don't understand a market segment or their willingness to pay, you might land fewer sales and less revenue than you expected.
Plus, as mentioned above, customers can get angry and stop doing business with you. Both situations result in a loss of profits and should be avoided at all costs.
Again, you can ensure your business profits from price segmentation by relying on data-driven decisions, not guesswork.
In-House Confusion
If you plan on carrying out price segmentation, you'll need to provide clear communication among your departments. Otherwise, there could be confusion or inconsistencies with your new pricing structure.
Not only will this cause friction internally, but it could also lead to customers feeling alienated. Make sure key members of sales, product, marketing, and support teams are involved in the transition. Also, provide training on the new products and customer segment for your sales staff.
Price segmentation FAQs
Let’s answer some common questions about price segmentation.
Is price segmentation good or bad?
If used the right way, a price segmentation strategy can become a competitive advantage for your company. It's a fantastic tool for attracting a wider variety of customers and selling more products efficiently.
That said, not all businesses can benefit from price segmentation. Think about the importance of price segmentation and whether it would work for your company before creating your pricing strategy.
Under what conditions is price segmentation most effective, or when does price segmentation work?
Price segmentation will be most effective if you can clearly identify different needs and motivations in each segment of your market. Without that information, it'll be like throwing darts with a blindfold on. You need to understand your customers and how and why they spend before you can reap the benefits of a price segmentation strategy.
How does price segmentation increase profit?
Companies that understand the importance of price segmentation use it to keep their prices competitive and attractive to a wider range of potential customers. As a result, they typically sell more products or services to a larger piece of the market. Plus, segmentation can help you meet the specific needs of different segments in your industry.
In short, effective price segmentation leads to higher customer acquisition and longer customer retention.
Conclusion
The bottom line is price segmentation can be extremely valuable for your brand strategy if done correctly. Not only can you increase your profits, but you can also get more reach on market share, tweak your marketing strategies, and help others with conditional pricing.
That being said, don't neglect managing and tracking your price segmentation strategy. It could save your business from customer complaints or ending up with a price discrimination lawsuit.
For more help on SaaS pricing strategies, you can check out the flexible SaaS billing solutions at Chargebee.
