Part 5: Price Segments and Components

Segments to Receive the New Price

Capsule: The segments to receive the new price result from the pricing pressures and opportunities the market environment creates. These segments differ in falling price environments from those in rising price environments.

The company segments its market in order to isolate those segments who will receive the new prices, while leaving the remaining segments in the market to pay the former prices. This segmentation exercise is different from that in our Improve/Segments section of StrategyStreet. In the Improve/Segments section of StrategyStreet, we segment customers by the size of their relationships and by their unmet needs in order to identify segments where the company might gain share and then to find opportunities to develop products and services to satisfy those unmet needs. In contrast, this price-based segmentation of the market focuses on competitive pressures and opportunities. Competitors, rather than the customers themselves, drive this segmentaiton to determine where to offer different prices. These pricing segments are different when prices are falling than when prices are rising. We will examine each of these two environments in turn. Normally, you would analyze only one of these environments for your Pricing diagnosis.

Falling Price Environment

In a falling price environment, the company uses pricing to maintain its market share and, if possible, find margin improvement opportunities by making new customer sales or by inciting customers to assist the company in improving its margins. From extensive study of many pricing reductions, we have found that companies in falling price environments use three common customer segments:

  • Product Purchased Segments. Customer segments purchasing a particular product or product component receive the lower price. Companies use this segmentation when the focus of price competition is on a particular product or group of products. The Product Purchased segments include:

  • Product System Component Segments. Illustrative Examples>> These are segments of customers who would respond to a lower price on one of the components of the product system that the customer segment uses in addition to the main product.

  • Product Cost Savings Segments. Illustrative Examples>> These are customer segments who would or do purchase a product that has, or is likely to have, specific savings in its costs. Often this is a product at a new, lower, Price Point.

  • Volume Purchased Segment. Illustrative Examples>> This is a customer segment who purchases a volume of product that is greater than the average customer.

  • Loss Leader Segment. Illustrative Examples>> This is a segment of customers who would be attracted to a low price for a product and then would be likely to purchase other products with higher margins.

  • Affiliated Member Segment. Illustrative Examples>> This is a segment of customers that have some kind of relationship with the company, including a membership group. a "points for purchases" group, a "friends and family" groups.

  • Introductory Offer Segment. Illustrative Examples>> This segment of customers who will purchase a newly introduced product for a low price.

Product Purchased Segments Questions

Evaluate the price reductions in the market over the last few years to determine how the industry has used Product Purchased segments.

  • Are there components of the product that competitors have isolated from the main product for separate pricing?

  • Has a competitor introduced a new lower Price Point which is attracting customer purchases?

  • How are volume discounts offered in the market?

  • Do competitors offer Loss Leader products in the market?

  • Has any competitor created groups of customers affiliated in some way with the company?

  • Have competitors used discounted pricing to introduce new products to the market?

  • Have any competitors gained share with these segments?

  • Margin Building Segments. There may be opportunities in a falling price environment for the company to use some customer segments to help it improve its margins. These customer segments would take actions, which the average customer does not take, to improve company revenues or to reduce company costs. In return, they receive a lower price.

  • Customer Cost Savings Segment. Illustrative Examples>> This segment of customers acts to save the company costs in return for a lower price.

  • Low Demand Period Segment. Illustrative Examples>> This customer segment is willing to purchase products during a period of low demand for the company.

  • Company Revenue Improvement Segment. Illustrative Examples>> Some customer segments are willing to act to improve the company's revenues.

Margin Building Segments Questions

Evaluate the price reductions in the market over the last few years to determine how the industry has used Margin Building segments.

  • Have any competitors succeeded in gaining customer sales by offering some customers lower prices where the customer has saved the competitor costs?

  • Has any competitor offered lower prices during periods of low demand for the competitor?

  • Has any competitor offered a lower price to a customer who acts to improve the competitor's revenues?

  • Have any competitors gained share by exploiting these segments?

  • Competitive Supplier Segments. In some markets, the falling prices are the result of aggressive pricing by a particular competitor or competitor type (for example, Price Leader discounters). Customer segments who do, or could, purchase from these discounting competitors receive the low price. These segments include:

  • Target Competitor Segment. Illustrative Examples>> Customers who are, or are likely to be, served by a competitor that is either weak or strong in the marketplace receive this low price.

  • Occasion Segment. Illustrative Examples>> This segment of customers purchases products on a particular occasion and receives the low price during the occasion.

  • Individual Customer Segments. Illustrative Examples>> In some markets, especially Hostile markets, some customers will negotiate much more aggressively than others. This leads to prices that are set by individual customer. The customer is a segment of one.

  • Public Relations Segment. Illustrative Examples>> This segment of customers needs special treatment from the company. This treatment may be a low price.

  • Location Segment. Illustrative Examples>> Customer segments who purchase in a particular location receive the lower price.

  • Relationship Renewal Segment. Illustrative Examples>> This segment of customers is about to renew its relationship with the company. The renewal may bring a lower price.

Competitive Suppler Segments Questions

Evaluate the price reductions in the market over the last few years to determine how the industry has used Competitive Supplier segments.

  • Is any particular competitor, or competitor type (eg. Price Leader, Next Leader or Price Shaver), offering lower prices in the market? How have competitors responded to these particular competitors?

  • Have there been any lower prices offered in the market place around particular occasions or sale periods?

  • Have competitors offered prices tailored to individual customers? If so, how?

  • Have competitors offered lower prices to imrpvoe their relationships with their customers, especially after a failure by the competitor offering lower prices?

  • Have any competitors offered discounts for products perceived to have relatively low performance in the market?

  • Have competitors offered lower prices in one or several geographic locations? If so, where and why?

  • Have competitors offered lower prices to customers who renew their relationships with the competitor? Why was this lower price necessary?

  • Have any competitors offered to renew their relationships with customers before the relationship comes due?

  • Have any competitors gained share by exploiting these segments?

For a fuller explanation of these segments, please see Improve/Pricing/Directions-Reduce Price/Choice 2 Directions.

Rising Price Environment

When a company wishes to raise prices for some, but not all, segments of customers, its segmentation depends on the competitor for the customer being unlikely to counter the company's price increase. As we saw in Diagnose/Pricing/Company Price Environment/Competition and Their Knowledge, Capacity and Will, the competitor is unlikely to counter the company's price increase if the competitor does not:

  • know of the price increase

  • have the capacity to respond to the price increase with a lower price

  • have the will to risk its profits by offering a lower price

Accordingly, the company isolates segments to receive the higher price where one or more of these conditions exist with the competition. These segments include:

  • Customer segments who are captive to the company. Some customer segments are effectively captives of the company due to their strong preference for one or more components of the company's current performance package. These segments include customers with strong preferences for such benefits as:

  • A unique Function where the company offers the user a Function others do not or can not offer. Illustrative Examples>>

  • A unique Reliability, where the company offers the customer a unique brand reputation, signifying the quality of the product and the company's standing behind the product, or where the company offers a channel of distribution certainty of long-term and consistent market presence of the seller with the channel or the ability to delivery product as, and when, ordered. Illustrative Examples>>

  • A unique Convenience where the company offers the buyer the easiest purchase and installation process. Illustrative Examples>>

  • Segments of customers where competitors can not counter the company's change in value. These segments may require a particular component of the product system. In other cases, the competitor would not even know of the change in Price and Performance. These include:

  • Customer segments who purchase products with higher cost components. Illustrative Examples>> Because these products have higher costs, they command higher prices. These segments are usually purchasing a higher Price Point.

  • Customer segments with high servicing costs. Illustrative Examples>> These customers, often smaller customers in the market, have costs above those of the more attractive, larger customers and must pay a higher price for their purchases.

  • Customer segments making higher-than-average use of capacity. Illustrative Examples>> These customers are more intensive users of the company's products and its capacity and, therefore, pay a higher-than-average price for their purchases.

  • Customer segments purchasing during a period of unbalance supply and demand. Illustrative Examples>> Customers who purchase when available capacity is low are unlikely to receive a lower price offer from a competitor, who would also face capacity constraints.

  • Customer segments served by competitors likely to follow the Price increase. Illustrative Examples>> Customer segments who purchase in markets where industry leaders set Prices, which the remaining competitors typically follow, or where competitors are unwilling to use Price as a competitive weapon will see higher prices because of this lack of Price competition.

Rising Price Environment Questions

Evaluate the price increases over the last few years to determine how the market has segmented customers to raise prices.

  • Have competitors begun raising prices to some segments more than, or instead of, others?

  • Have competitors raised prices on customers who must purchase from them because of their distinctive Performance in the form of a unique Function, Reliability or Convenience benefit?

  • Have competitors raised prices to some segments of customers because the segments must use a particular component of the competitor's product?

  • Have competitors raised prices to customer segments who terminate their supplier relationships or customers purchasing at a particular occasion or period of time?

  • Have competitors introduced products with higher Price Points in the market? If so, are the prices of those Price Points rising faster than those on other products?

  • Are competitors raising prices on customers with high servicing costs or those making greater than average use of the competitors' capacity?

  • Do competitors tend to raise prices during periods of higher than average demand?

  • Have the company's competitors tended to follow the company in its price increases? Have they matched the terms and conditions of these price increases?

  • Has any competitor gained an advantage by exploiting these segments?

Once you have reviewed the sections on priced-based segmentation, try the tests.

For more explanation and many examples of each segment, see Improve/Pricing/Directions-Raise Price/Choice 2 and the Innovation Examples that follow these Directions.

Basic Strategy Guide Users Go To: Step 23

Summary Points Next: Components of Price Used to Target the Chosen Segment