PRICING STRATEGY

Module 3 – Price Structure

Midterm Examination

● Use of a characteristic such as gender,

PROBLEMS IN PRICE SEGMENTATION
● There are at least two difficulties in
accomplishing price segmentation:
○ One cannot expect customers to
voluntarily identify themselves as
willing to pay prices that are higher
than those paid by other customers.
★ Arbitrage – the practice of buying a
product at a low price in order to sell
it to others at a higher price
ACCOMPLISHING PRICE SEGMENTATION
★ Price fence - a means to charge different
customers different price levels for the
same products and services using the
same metrics.
race, religion, or ethnic group is very
likely to violate customer sensitivities and
should generally be avoided.
PRICE SEGMENTATION BY QUANTITY
● The best price for those customers who
buy larger quantities of a product is often
lower than that for those customers who
buy smaller quantities of the product.
COMMONLY USED PRICE SEGMENTATION
BY QUANTITY
● Order-size discount
● Cumulative-purchase discount
● Fixed-charge pricing
● Two-part pricing
● Step discounts

★ A price-segmentation fence is a
PRICE SEGMENTATION BY PRODUCT
criterion that customers must meet to
FEATURES
qualify for a lower price.

● Six major types of price-segmentation

fences:
○ Customer characteristics
○ Purchase quantity
○ Product features
○ Design of product bundles
○ Time of purchase or use
○ Place of purchase or use PRICE SEGMENTATION BY DESIGN OF
PRODUCT BUNDLES

CONSTRAINT ON THE USE OF CUSTOMER

CHARACTERISTICS
● A perception of unfairness is particularly
likely when it is perceived that other
customers are paying a lower price not
because of something these customers
choose to do but simply because of who
they are.

1
 profitable to charge them lower per-unit
PRIORITY SEGMENTATION BY TIME
prices.
● Priority pricing
● When the best price for a product is
PRICE SEGMENTATION BY LOCATION higher for customers who are interested
in an optional product-enhancing feature
● FOB-origin (free on board) pricing or lower among customers who can
● Uniformed-delivered pricing tolerate an optional product-diminishing
● Zone pricing feature, then it may be profitable to use a
● Basing-point pricing feature-dependent premium or discount.
● Freight-absorption pricing
● When one product is more valued by one
SUMMARY of two segments and another product is
more valued by the other, then it may be
● Designing an optimal price structure that
profitable to sell a bundle containing both
effectively segments your market and
products at a price lower than the total
maximizes your profitable sales
charged for the two products purchased
opportunities is clearly among the most
separately.
difficult, but potentially rewarding,
aspects of pricing strategy.
● Many firms will be able to simultaneously
use more than one price-segmentation
● An important aspect of price structure
fence. Understanding the use of
concerns price segmentation, the
price-segmentation fences is of key
practice of a seller charging different
importance in a firm’s ability to use price
customers different prices for the same
to maximize profits
product.

● Price segmentation could be warranted

because some customers value the
product more than others, are more or
less costly to serve than others, or show
more or less price sensitivity than others.

● To accomplish price segmentation, it is

necessary to have a fence, or criterion
that customers must meet to qualify for a
lower price.

● It is possible to use an observable

characteristic of customers, such as age
or student status, as a price
segmentation fence, although such use
may be considered unfair.

● When the best price for a product is

lower for customers who buy larger
quantities of the product, then it may be