Segment Pricing

What is Segment Pricing? Segment pricing involves dividing your target market into different groups (or segments) based on their willingness to pay. The willingness to pay can be based on location, time and/or customer type to name a few.

Location: Different geographical locations have different cost structures. For example, costs in big cities are much higher than in suburban or rural areas. Rents are higher, labor costs are higher, taxes are usually higher, and the price index overall is higher in big cities. Offering one price across the entire country does not make sense.

Time: The price a person is willing to pay for a new car tire will be much higher when the driver has a flat tire on the side of the road versus when the tire is just worn down and needs replacing soon. Or a hotel may offer cheaper prices on the weekend than during weekdays. Or a movie theater offers cheaper ticket prices in the afternoon during weekdays than in the evening.

Customer type: Customers can be divided into many categories. Age, gender, businessmen versus tourist travelers, and on and on…. There are many possibilities, or even a combination of possibilities, to segment customer types.

Look at the illustration below:

Imagine this is a hotel and there are 100 rooms available.  The downward sloping line is the demand curve.  At $100 the hotel will sell zero rooms.  At $0 the hotel will be completely full.  The traditional economic model on the left will tell you the price that will maximize revenue will be $50 and you will sell 50 rooms resulting in $2,500 for that night.  You can try any other combination of setting a price point and looking at the number of rooms you will sell but none will result in more revenue.  Therefore, $50 is the optimal price point according to the traditional economic model.

Now, the graph on the right uses Segment Pricing.  By setting different prices for different customers based on their willingness to pay you can book 80 rooms at prices ranging between $80 a night to $20 a night.  The result is $4,000 in revenue for the night with 80 percent occupancy.  And even though you lowered your prices for some customers you need to remember those customers may still eat in the hotel restaurants, drink in the bars, use the spa, etc., generating even more revenue.  You can even offer a 20% discount coupon for dinner in the least utilized restaurant, or a free drink at the bar to get customers to go in and spend more money!

If the bar is full of businessmen talking after work from 5 to 7pm, then offer a free drink coupon valid after 7 or 8pm to get customers in when the bar is not full.  Now you are utilizing customer type to book the rooms, location, and time to maximize revenue! 

Now, going back to the room prices, I am sure many of you are wondering how we can offer different prices to different customers without the customers who are paying the higher prices from screaming that is it unfair!

I’ll answer this question in my next blog titled Fenced Pricing.