Chapter 8: Price Structure

Tactics for Pricing

Differently Across Customer
Segments
Tactics for Pricing
Differently Across Customer
Segments
Tactics for Pricing
Differently Across Customer
Segments
Tactics for Pricing
Differently Across Customer
Segments
Tactics for Pricing
Differently Across Customer
Segments
Tactics for Pricing
Differently Across Customer
Segments
What is a price structure?

A price structure in the context of business and economics refers to the framework and
organization of pricing for products or services. It encompasses various factors and elements that
influence how a company sets the prices for its offerings. A well-structured price model is crucial for a
business's success, as it affects profitability, competitiveness, and customer perception.
A typical price structure may include elements such as base prices, discounts, volume-based
pricing, geographical pricing, cost-plus pricing, psychological pricing, and dynamic pricing. Base prices are
the standard prices set for products or services. Discounts can be applied to incentivize bulk purchases or
customer loyalty.
Volume-based pricing offers lower unit costs for larger quantities. Geographical pricing considers
different pricing strategies for various regions. Cost-plus pricing involves adding a markup to the cost of
production. Psychological pricing uses price points that influence consumer perception. Dynamic pricing
adjusts prices based on real-time market conditions.
• A price structure is a way of organizing and setting the prices for products or services. It depends on
many factors, such as the cost of production, the demand and supply, the competition, and the
customer behavior. A good price structure can help a business to make more profit, attract more
customers, and stand out from other businesses. Here are some examples of elements that can be
part of a price structure:

- Base prices: These are the standard prices that a business charges for its products or services. For
example, a coffee shop may have a base price of $3 for a cup of coffee.

- Discounts: These are reductions in the base prices that a business offers to customers for various
reasons. For example, a coffee shop may offer a 10% discount to students or a buy-one-get-one-free
deal.

- Volume-based pricing: This is a pricing strategy that lowers the unit cost of a product or service when
the customer buys more. For example, a coffee shop may charge $3 for one cup of coffee, but $5 for
two cups, or $10 for five cups.

- Geographical pricing: This is a pricing strategy that varies the prices of a product or service based on
the location of the customer. For example, a coffee shop may charge more for a cup of coffee in a city
center than in a rural area.

- Cost-plus pricing: This is a pricing strategy that adds a markup to the cost of production of a product
or service. For example, a coffee shop may calculate the cost of making a cup of coffee, including the
ingredients, labor, and overhead, and then add a percentage of profit to determine the price.

- Psychological pricing: This is a pricing strategy that uses price points that influence the customer's
perception of the value of a product or service. For example, a coffee shop may charge $2.99 instead
of $3 for a cup of coffee, to make it seem cheaper and more appealing.

- Dynamic pricing: This is a pricing strategy that adjusts the prices of a product or service based on
real-time market conditions, such as demand, supply, competition, and time. For example, a coffee
shop may charge more for a cup of coffee during peak hours or when there is a shortage of coffee
beans.

Tactics for Pricing Differently Across Customer Segments

After developing products or

services that
creates value and making
customers aware
of it
o A MARKETER must
determine how
most profitably to capture a
share
of that value in both
volume and
margin
After developing products or services that creates value and making customers aware of it

 A MARKETER must determine how most profitably to capture a share of that value in both
volume and margin.
 Pricing differently across customer segments means setting different prices for your products or
services based on the specific characteristics or needs of different groups of customers. Here's a
simple explanation: Imagine you have a product that can be valuable to different types of
customers. Instead of charging the same price to everyone, you adjust the price to suit each
group's willingness to pay. For example, you might offer discounts to students or special
packages for businesses. By doing this, you can maximize your profit by selling more to certain
groups who are price-sensitive and willing to buy in larger volumes while charging higher prices
to others who value your product more and are willing to pay a premium. This strategy helps you
capture the most value from your market, both in terms of sales volume and profit margin.

The challenge is that individual customers will value the differentiating features of products and
services very differently due to:

1. Differences in their abilities to pay

Individual customers have varying financial capabilities. Some may be willing and able to pay
a premium for additional features, while others have a more limited budget.
2. Their subjective preferences
Customers have unique tastes and preferences. What's valuable to one customer might not
be as important to another. This means that the perceived value of differentiating features
can vary greatly among customers.
3. Their end-use applications
Depending on how customers intend to use a product or service, certain features may be
crucial or insignificant. Tailoring pricing to these specific applications can be a challenge.
 4. And their prior experience with the product category
Customers' past interactions with a product category can influence their perception of value.
Some may be willing to pay more for added features based on positive experiences, while
others may not see the same value

The significant differences in the cost to serve customers/ clients can be driven by:

1. The timing of customer’s needs

The timing of when a customer requires your product or service can impact the cost of
serving them. Urgent or immediate needs may require expedited service, which can be more
costly.
2. The speed of their payments
The speed at which customers make payments can affect costs. Slow-paying customers may
require more resources for follow-ups and credit management, while prompt payers reduce
these costs.

Creating a Price Structure

Creating a price structure for your pricing strategy involves a systematic approach to setting
prices for your products or services. Here's a step-by-step guide on how to establish a price structure:

1. Market research:
o Begin by conducting comprehensive market research. Understand your target audience,
competitors, and the demand for your product or service.
o Analyze the price range that customers in your market are willing to pay.
Market research is like detective work for businesses. It involves studying your potential
customers, checking out your competition, and figuring out how much people are willing
to spend on what you're selling. You want to know your customers' preferences, what
other businesses are doing, and how much money people are ready to shell out for your
product or service. This helps you set the right price and make smart decisions about
your business.
2. Cost Analysis:
o Calculate the total cost of producing or offering your product or service. This includes
direct costs, indirect costs, and overhead.
Cost analysis is like analyzing or counting all the money you spend to make or provide
your product or service. You need to add up all the costs, like the money you spend
directly on making it, other expenses that are related but not direct, and the general
costs of running your business. This helps you understand how much it really costs to
make or offer what you have.
3. Pricing Objectives:
o Define your pricing objectives. Are you aiming for maximum profitability, market share,
or brand positioning? Your objectives will influence your price structure.
Pricing objectives are like setting your goals for how you want to price your product or
service. Do you want to make as much money as possible, have a big share of the
market, or make your brand look really good? Your goals will shape how you decide on
the price for your product.
4. Base Price:
o Set a base price that covers your costs and provides a reasonable profit margin. The base
price is the starting point for your price structure.
The base price is like your starting point for pricing. You figure out a price that covers all
your costs and gives you a fair profit. It's the foundation for deciding how much you'll
charge for your product or service.
5. Discounts and Incentives:
 o Determine if you'll offer discounts for bulk purchases, early payments, or loyalty
programs. These can be part of your price structure to encourage customer loyalty and
higher sales volumes.
Discounts and incentives are like special deals to make your customers happy and buy
more. For example:
- Bulk Purchases:If someone buys a lot of your product at once, you might give them a
discount. For instance, a store might offer 10% off if you buy 10 items instead of just
one.

- Early Payments: Some businesses offer a discount if you pay them quickly. Let's say you
get 5% off your bill if you pay within 7 days instead of the usual 30.

- Loyalty Programs: These are like rewards for coming back. For instance, a coffee shop
might give you a free coffee after you've bought 10. These discounts and incentives are
part of your pricing strategy to keep customers happy, coming back, and buying more.
6. Segmented Pricing:
o Consider segmenting your market and offering different prices to different customer
segments. This may be based on location, demographics, or purchasing behavior.
Segmented pricing is like tailoring your prices to different groups of customers. For
example:

- Location: You might charge different prices in different cities or countries because the
cost of living varies.

- Demographics: Young people might get a discount while seniors get another price
because their needs and budgets are different.

- Purchasing Behavior:If some customers buy a lot from you, they might get lower prices,
while occasional buyers pay more.

Segmented pricing lets you match your prices to what each group is willing to pay, which
can boost your sales and profits.
7. Psychological Pricing:
o Employ psychological pricing strategies, such as setting prices just below round numbers
(e.g., $9.99 instead of $10), to influence consumer perception.
Diba sa marketing natin, isa sa consumer psychology and pricing is the price endings
where people tend to choose a product na naga end sa odd numbers like 9.
Psychological pricing is a trick businesses use to make you think a price is better than it
really is. They do things like pricing something at $9.99 instead of $10. It makes it feel
like a better deal, even though it's just one cent less. It's all about how our brains see
numbers.
8. Dynamic Pricing:
o Explore dynamic pricing, which adjusts prices in real-time based on factors like demand,
competition, and inventory levels.
Dynamic pricing is like a flexible price tag that changes as the situation changes. For
example, airlines might charge more for a plane ticket if it's a busy travel day and the
seats are filling up fast. But they might lower the price if there are still lots of empty
seats. It's all about adjusting prices to what's happening right now.
9. Pricing Strategy Review:
o Regularly review and update your pricing strategy. Market conditions change, and your
price structure should adapt accordingly.
10. Testing:
o Conduct pricing experiments to see how different price points affect sales and
profitability. Use A/B testing to fine-tune your pricing structure.
 11. Competitive Analysis:
o Continuously monitor your competitors' pricing strategies. Ensure your price structure
remains competitive within the market.
12. Customer Feedback:
o Collect and analyze customer feedback regarding your pricing. This can provide valuable
insights into customer perception and willingness to pay.
13. Profitability Analysis:
o Regularly analyze your pricing structure's impact on profitability. Adjust as needed to
achieve your pricing objectives.

Remember that creating an effective price structure is an ongoing process. It requires a deep
understanding of your market, your costs, and your customers' behavior. Regularly assess and adapt your
price structure to ensure it aligns with your business goals and market conditions.

Challenges That Can Undermine Segmented Pricing

Segmentation is much more challenging for pricing than for other aspects of marketing because:

 Customers to whom you intend to charge a higher price have a strong incentive to undermine it.
 Will try to disguise themselves as customers who should qualify for a lower price.
 Channel intermediaries too can undermine a segmented pricing strategy by buying the product
intended for delivery to customers entitled to a lower price but then actually diverting it for
resale to customers targeted to receive a higher price – commonly referred to as gray markets.

Gray Market Sale

 They create a huge challenge for companies serving international markets because distributors
in countries where prices are lower cross ship products to ones where prices are higher.
 A manufacturer then loses higher-priced sales in the high value country due to gray market
competition form its own products that have been parallel imported from lower priced
countries.
 Sales are lost even in the low-price country due to shortages that develop when products are
diverted away from the low-price market.

Example of Grey Market Sale:

A specific drug can have two different uses with correspondingly two different levels of
clinical value delivered. For example, a drug used to treat a high-risk disease like cancer might
also be useful for treating eye irritation. The challenge for a pharmaceutical company is to
develop a strategy that allows it to charge differently depending on how the drug is being used.
One common tactic is to introduce two versions of drug, each with a unique brand name and
dosing guidelines, even if the active ingredient is the same. The challenge, of course, is that
some enterprising physicians might purchase the cheaper version of the drug, adjust the dosing
to achieve the same result in the higher clinical-value setting, and pocket the difference in cost
of the drugs used in the Philippines.

Three Mechanism to Form a Segmented Price Structure

1. Offer configurations

Offer configuration refers to the process of designing and customizing product or service
offerings to meet the specific needs and preferences of customers. It involves tailoring the features,
pricing, and terms of an offer to align with individual customer requirements or market segments. Offer
configuration is commonly used in various industries, including e-commerce, software,
telecommunications, and manufacturing.
  A seller can seller can segment the market by configuring different offers consisting of
different bundles of features and services for different segments.
 Using offer configurations to implement segmented pricing requires minimal
enforcement of price differences because customers will self-select the offers that
determine their prices.

Here are some key aspects of offer configuration:

o Product Customization: Offer configuration often involves allowing customers to

customize products or services to match their unique preferences. This can include
selecting product features, colors, sizes, and other specifications. For example, when
purchasing a computer, customers may have the option to choose the type of processor,
memory, and storage.
o Bundle Creation: Offer configuration enables the creation of product bundles where
customers can choose multiple items as a package deal. This can lead to cost savings for
customers and increased sales for businesses. For instance, a cable TV provider may
offer different channel bundles to cater to various viewing preferences.
o Subscription Management: In subscription-based businesses, offer configuration may
involve managing different subscription plans with various features and pricing tiers.
Customers can choose the plan that best fits their needs, whether it's a basic, premium,
or enterprise subscription.
o Discounts and Promotions: Offer configuration allows for the application of discounts,
promotions, and special offers. Customers may be eligible for discounts based on their
selected configuration or as part of a promotion.

2. Price metrics

Price metrics are quantitative measures and indicators used to assess, evaluate, and analyze
pricing strategies, performance, and the effectiveness of pricing decisions within a business. These
metrics provide valuable insights into how pricing impacts a company's revenue, profitability, and
customer behavior. Some common price metrics include:

o Price Elasticity: Price elasticity measures how sensitive customer demand is to changes
in price. It helps businesses understand whether increasing or decreasing prices will lead
to significant changes in sales and revenue.
o Price-to-Earnings (P/E) Ratio: In finance, the P/E ratio is used to evaluate the relative
value of a company's stock by comparing the current share price to its earnings per
share (EPS). It provides insights into market perceptions of the company's future
earnings potential.
o Gross Margin: Gross margin is the difference between the cost of goods sold (COGS) and
the selling price. It reflects the profitability of a product or service and is a crucial pricing
metric.
o Net Profit Margin: This metric assesses the profitability of a business by comparing net
income to total revenue. It shows how much of the revenue is retained as profit after all
expenses are accounted for.
o Discount Rate: The discount rate is used in discounted cash flow (DCF) analysis to
determine the present value of future cash flows, considering the time value of money.
It is a critical metric for investment and pricing decisions.
o Contribution Margin: Contribution margin represents the portion of revenue that
remains after variable costs are deducted. It is used to assess the profitability of
individual products or services.

Example of price metrics: a health club could charge per hour of use, per visit, per an annual
membership for unlimited access, or per some measure of benefit (inches lost at the waist or gained at
the chest). The club might also vary those prices by time of day (low for a midday membership, higher
for peak time membership) or by season of the year to reflect differences in the opportunity cost of
capacity.

3. Price fences

A price fence is a marketing and pricing strategy used by businesses to offer different prices or
discounts to different customer segments based on certain criteria. The goal of implementing price
fences is to maximize revenue and profit by tailoring pricing strategies to the willingness and ability to
pay of different customer groups. This strategy is commonly used in industries such as airlines, hotels,
and theme parks, where businesses aim to price discriminate effectively.

Price fences can be based on various factors, including:

 Time: Offering lower prices for off-peak hours, days, or seasons.

 Age: Providing discounts for children, students, or senior citizens.
 Membership: Offering lower prices for members or subscribers.
 Group size: Discounting prices for larger groups or families.
 Advanced booking: Providing cheaper rates for customers who book well in advance.
 Location: Offering different prices based on the customer's location, such as local resident
discounts.
 Class or service level: Providing different price points for standard and premium services.