Segmented Pricing

Companies will often adjust their basic prices to allow for differences in customers, products and locations. In segmented pricing, the company sells a product or service at two or more prices, even though the difference in prices is not based on differences in costs. Segmented pricing takes several forms:

• Customer-segment pricing. Different customers pay different prices for the same product or service. Museums, for example, will charge a lower admission for young people, the unwaged, students and senior citizens. In many parts of the world, tourists pay more to see museums, shows and national monuments than do locals.

• Product-form pricing. Different versions of the product are priced differently, but not according to differences in their costs. For instance, the Dutch company Skil prices its 6434H electric drill at DF1200, which is DF1125 more than the price .of its 6400H. The 6434H is more powerful and has more features, yet this extra power and features cost only a few more guilders to build in.

• Location pricing. Different locations are priced differently, even though the cost of offering each location is the same. For instance, theatres vary their scat prices because of audience preferences for certain locations and EU universities charge higher tuition fees for non-EU students.

• Time pricing. Prices vary by the season, the month, the day and even the hour. Public utilities vary their prices to commercial users by time of day and weekend versus weekday. The telephone company offers lower 'off-peak' charges and resorts give seasonal discounts.

segmented pricing Pricing that allowsfor differences in customers, products and locations. Tfie differences in prices are not based on differences in costs.

For segmented pricing to be an effective strategy, certain conditions must exist. The market must be segmentable and the segments must show different degrees of demand. Members of the segment paying the lower price should not be ably to turn around and resell the product to the segment paying the higher price. Competitors should not be able to undersell the firm in the segment being charged the higher price. Nor should the costs of segmenting and watching the market exceed the extra revenue obtained from the price difference. The practice should not lead to customer resentment and ill will. Finally, the segmented pricing must he legal.

Psychological Pricing

Price says something about the product. For example, many consumers use price to judge quality, A SI 00 bottle of perfume may contain only S3 worth of scent, but some people are willing to pay the $100 because this price indicates something special.

In using psychological pricing, sellers consider the psychology of prices and not simply the economics. For example, one study of the relationship between price and quality perception of ears found that consumers perceive higher-priced cars as having higher quality.15 By the same token, higher-quality cars are perceived as even higher priced than they actually are. When consumers can judge the quality of. a product by examining it or by calling on past experience with it, they use price less to judge quality. When consumers cannot judge quality because they lack the information or skill, price becomes an important quality signal (see Marketing Highlight 17.1).

psychological pricing A pricing approach that considers the psychology of prices and not simply the economics; the price is used to say something about the product.

Expense marks diamonds tlexirable and very giftable.

Psychological PricingPsychological Pricing

reference prices Prices that buyers curry in [heir minds ami refer to when they look at a givenproduct.

Another aspect of psychological pricing is reference priecs - prices that buyers cam' in their minds and refer to when looking at a given product. The reference price might lie formed by noting current prices, remembering past prices or assessing the buying situation. Sellers can influence or use these consumers' reference prices when setting price. For example, a company could display its product next to more expensive ones in order to imply that it belongs in the same class. Department stores often sell women's clothing in separate departments differentiated by price: clothing found in the more expensive department is assumed to be of better quality. Companies also can influence consumers' reference prices by stating high manufacturer's suggested prices, by indicating that the product was originally priced much higher or by pointing to a competitor's higher price.

Even small differences in price can suggest product differences. Consider a stereo priced at £400 compared to one priced at £399.95. The actual price difference is only 5p, but the psychological difference can be much greater. For example, some consumers will see the £399.95 as a price in the £300 range rather than the £400 range. Whereas the £399.95 is more likely to be seen as a bargain price, the £400 price suggests more quality. Complicated numbers, sueh as £347.41, also look less appealing than rounded ones, such as £350. Some psychologists argue that each digit has symbolic and visual qualities that should be considered in pricing. Thus, 8 is round and even and creates a soodiing effect, whereas 7 is angular and creates a jarring effect.1-1

promotional pricing

Temporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales.

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  • suk
    How are manufacturers able to practice segmented pricing?
    6 years ago

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