A common mistake many companies make is believing that they are the ones who dictate the value of their products.
NB: This is an article from Revenue Management Labs
In reality, it is their customers who decide what an offering is worth and whether they are willing to purchase it. Like snowflakes, every one of your customers is unlike any other. However, also like snowflakes, many are very similar. This is where price segmentation comes in.
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One of the first uses of price segmentation was in the airline industry during the early 1980s. It was used during a mild recession and when a brand-new airline deregulation act had been recently introduced that posed a substantial threat to American Airlines and the larger airline industry. With these challenges, many American Airlines flights had a surplus of empty seats, and industry demand was shifting to low-cost, low-fare airlines, as American Airlines was failing to adequately demonstrate the greater value it was providing.
To mitigate this problem, Robert Crandall, who was chairman and CEO of American Airlines at the time, helped pioneer the use of a variable pricing strategy, which was focused on maximizing revenue based on anticipating consumer behaviour. Crandall created a system that would specifically target varying discounts to flights that were flying empty on a day-by-day basis. As a result of this implementation, Crandall was able to unlock multiple streams of revenue and incremental margin for the business, resulting in an additional $500 million in revenue and a 48% increase in profits compared to the previous year.
Using this strategy, the production of American Airlines analysts also increased by 30%, as they were better equipped to make sound revenue decisions. This one change was not only able to generate additional bottom-line growth, but it increased the efficiency and effectiveness of the analyst team. Over the years, variable pricing has become almost exclusively automated, and many additional features have been introduced.
With the successes that were seen in the airline industry using price segmentation, many other industries with capacity constraints followed. Marriott was one of the first hotels to implement this pricing strategy and was able to generate a $200 million increase in annual revenue. Over the next 40-plus years, many more companies and industries have leveraged price segmentation to drive incremental dollars in revenue and margin.
Have you ever wondered if you are charging the right price for your products? Are you worried that customers are walking away from your products due to the price? Do you feel that you are not maximizing your revenue because your price is not based on your customer willingness-to-pay? If you have asked yourself any of the above, then you should consider price segmentation.
Price segmentation is a pricing strategy that involves setting different prices for the same product or service to different market segments based on the customers ability and willingness-to-pay. This strategy has been proven to increase revenue and overall profitability. A key factor that can be used to capture that white space is the price sensitivity of each customer group. With price segmentation, you can reap the higher profits from customers willing to pay premium prices, whilst still capturing profit from the price sensitive customers.
IMPACTS OF PRICE SEGMENTATION
There are examples of price segmentation everywhere: from student prices at the cinema to senior membership prices at the gym to fluctuating hotel room rates during the holidays. The airline industry is widely acclaimed as the king of price segmentation, as two passengers on the same flight very rarely pay the same rate. The practice of price segmentation has evolved and spread across many different industries throughout the years.
In April 2013, Adobe did something most companies would be afraid to do. It completely switched its revenue model from its iconic traditional boxed suite to a cloud-based online subscription service that made customers pay monthly to access the suite online. This switch was met with thousands of enraged customers early on, however, the service quickly gained traction and it grew the business substantially. With the switch to a cloud-based product, Adobe was able to go from an 18-month launch cycle to on-going launches, which allowed the company to shape efforts for different market segments. Within a year of launching the suite, customers grew by 244% and revenue grew by 50%. The new framework was able to provide an interactive business model, which allowed Adobe to act quickly and innovate continuously by investing in emerging technologies.