Self Test #23A: Targeting Segments for the New Price

Test #1:
How does a company change the level of price?

Answer:
The company changes the level at which it prices by taking two steps. First, it chooses the segments to receive the new price. Second, it uses one of the four components of price in order to limit the price change to its target segments.

Test #2:
Why segment customers in order to do pricing?

Answer:
The company segments customers in order to avoid having a price change affect all customers in the marketplace. It does this in the expectation that the segmentation will allow the company to achieve better results by limiting the price change to just the chosen segments.

Test #3:
How does this segmentation for pricing differ from the segmentation for new products and services?

Answer:
The segmentation for pricing focuses on those segments created by competitive price changes or opportunities. Really, the competition creates these segments.

On the other hand, the segmentation for the purpose of developing new products and services is a two-fold process. The first is segmentation by size, where customer relationships are divided into various sizes. The second is segmentation by need, where the company seeks to identify unmet needs of the customer. In these segmentations, customer characteristics, rather than competitive pressures, create the segments.

Test #4:
What segments do companies tend to use when changing the level of pricing in a falling price environment?

Answer:
There are three common segmentations that companies use to change pricing when prices are falling. The first is the Product Purchased segments. Companies use these segments when the focus of price competition is on a particular product or group of products. The second are Margin Building segments. These are segments that exist in most markets. These segments allow the company to incite its customers to help it improve its margins by reducing its costs or increasing its revenues. The third common segments are the Competitive Supplier segments. These segments occur in markets where the cause of falling prices is a particular competitor or competitor type.

Test #5:
What kind of customer segments fall under the Product Purchased segments group?

Answer:
Six common segment groupings fall under the Product Purchased segments. The Product System Component segment includes those customers who would respond to a lower price on one of the components of the product system. The Product Cost Saving segments are customer segments who would, or do, purchase a product that has specific savings in its costs, usually a lower Price Point product. The Volume Purchased segment is a segment of customers who purchases a larger than average volume. The Loss Leader segment is a segment of customers who would be attracted by the low price of a product and then would likely purchase other high margin products from the company. The Affiliated Member segment is a group of customers who have some kind of a relationship with the company, including various membership groups, loyalty programs and friends and family groups. Finally, the Introductory Offer segment is a segment of customers who will purchase a newly introduced product for a low price.

Test #6:
What customer segments would be considered Margin Building segments?

Answer:
There are three common sub-segments of the Margin Building segments. The Customer Cost Saving segment includes customers who act to save the company costs in return for a lower price. The Low Demand Period segments are customers who purchase when the company encounters a period of excess capacity. Finally, the Company Revenue Improvement segments include customer segments who are willing to act to help the company improve its revenues.

Test #7:
What customer segments might be included in the Competitive Supplier segments?

Answer:
Customer segments defined by the Competitive Supplier include several segments. Among those segments we find the Target Competitor segment. These are customers who are, or are likely to be, served by a particular competitor. The Occasion segment is a segment of customers who purchase product and receive a low price on a particular occasion. The Individual Customer segment often exists in Hostile markets and implies the customer is a segment of one. The Public Relations segment is a group of customers in need of special treatment from the company for some perceived failure by the company. The Performance Perception segment is a segment willing to purchase the company’s product despite the broader market’s belief that the product has performance below that of the competition. The Location segment is a segment of customers who purchase in a particular location. And finally, the Relationship Renewal segment is a group of customers who is about to renew its relationship with the company.

Test #8:
Identify the major segments (i.e., Product Purchased, Margin Building or Competitive Supplier) and sub-segment for each of these following examples:

Example:
Saks 25% off "Friends and Family" sale excludes Gucci, Cartier, Chanel, Loro Piana, Oscar de la Renta, Zegna, and Christian Louboutin.
(SIC 5600 – 2009)

Answer:
Product Purchased segmentation using an Affiliated Member segment

Example:
Greyhound has had to respond to deep fare cuts by some airlines. Continental recently slashed its Texas fares to as low as $9 between Dallas and Houston. So earlier this month, Greyhound announced new Texas ticket prices that included a $5 fare between the 2 cities.
(SIC 4111 – 1990)

Answer:
Competitive Supplier segmentation using a Location segment

Example:
In 1988, AT&T had Multi-Location Calling Plan that let companies earn discounts based on the traffic volume from all their locations, not just the main office.
(SIC 4813 – 1988)

Answer:
Product Purchased segmentation using a Volume Purchased segment

Example:
Although cigarette makers are raising prices, they are also bombarding smokers with promotions to soften the blow. Analysts estimate that smokers are actually paying only around 11% more than they were in September, although prices are up more than 27%.
(SIC 2111 – 1998)

Answer:
Competitive Supplier segmentation using a Public Relations segment

Example:
Mercedes-Benz is offering a discount deal to lease a sedan for $630/mo. for 36 mos., a $120-a-month savings from the old monthly payment. Cadillac Seville also comes with a discount lease.
(SIC 3711 – 1992)

Answer:
Product Purchased segmentation using a System Component segment.

Example:
While many retailers cut free shipping offers or made them subject to restrictions, Gap Inc offered free shipping to customers who registered their email address with the retailer before Thanksgiving. Vermont Teddy Bear offered a similar program.
(SIC 5900 – 2006)

Answer:
Margin Building segmentation using a Customer Cost Savings segment

Example:
The three main US manufacturers have relied for years on the advice of physicians, along with free packs of formula given to new mothers at hospitals.
(SIC 2023 – 1996)

Answer:
Product Purchased segmentation using an Introductory Offer segment

Example:
Most cruise costs are fixed whether a ship's berths are filled or not, so it is better to sell cheap than not at all. Last minute cruise bargains are widely available. Some are finding that it is cheaper to go on a cruise than to stay home.
(SIC 4481 – 2000)

Answer:
Competitive Supplier segmentation using an Occasion segment

Example:
To earn more Flex Funds from Philip Morris, retailers offer smokers of RJR's Winstons a free Marlboro cigarette and suggest they consider switching.
(SIC 2111 – 1998)

Answer:
Margin Building segmentation using a Revenue Improvement segment

Example:
Ross sells off-price family apparel at prices averaging 30% to 40% less than department stores.
(SIC 5600 – 1990)

Answer:
Product Purchased segmentation using a Product Cost Savings segment

Example:
Three carriers competed for business users by offering similar pricing schemes. As strategies converged, margins dwindled. When a new carrier entered the market in 1994 offering a different pricing plan tailored to low-volume users, the leaders copied its offer, squashing its attempt to be different.
(SIC 4812 – 1994)

Answer:
Competitive Supplier segmentation using a Target Competitor segment

Example:
As the housing market slows, home builders are rolling out incentives to encourage sales. Hovnanian Enterprises launched a "Deal of the Century" promotion which offers discounts of up to $149,000. The best discounts were available on homes that were already started.
(SIC 1521 – 2007)

Answer:
Margin Building segmentation using a Low Demand Period segment

Example:
Government and private health groups have negotiated discounts of 25-60%+ off usual wholesale prices.
(SIC 2834 – 1991)

Answer:
Competitive Supplier segmentation using an Individual Customer segment

Example:
Pratt offered a 96% discount on its engine for new Boeing 777 aircraft. GE bettered Pratt's offer with concessions worth an extra $30 million.
(SIC 3724 – 1993)

Answer:
Product Purchased segmentation using a Loss Leader segment

Example:
IBM says it is cutting prices by as much as 35% on some older models, as it introduces new computers.
(SIC 3571 – 1987)

Answer:
Competitive Supplier segmentation using a Performance Perception segment

Example:
Customers buy refilled cartridges for a fraction of what they'd pay for a new one. Those who trade in their old cartridges get a bigger discount.
(SIC 2893 – 2004)

Answer:
Competitive Supplier segmentation using a Relationship Renewal segment

Test #9:
In a rising price environment, the company would like to know that its competitors are unlikely to try to counter the company’s price increase with a lower price. What factors must the company consider in making that evaluation?

Answer:
The company must assess whether the competitor knows of the price increase, whether the competitor has the capacity to respond to the price increase with a lower price and whether the competitor has the will to risk its profits by offering a lower price.

Test #10:
What segments might the company see in a rising price environment?

Answer:
The company would expect to see customer segments where the competitor for the customer does not know of the price increase or doesn’t have the capacity or will to respond to it. These segments include three primary segmentations. The first are customer segments who are captive to the company due to their strong preference for the company’s current performance package. The second are segments of customers where competitors cannot counter the company’s change in value because they don’t know of the change in value, or because they do not offer the product or its component or don’t offer it at a particular occasion. Finally, there are segments of customers where competitors are likely to be unwilling to counter the company’s change in value. These include segments of customers purchasing higher cost components or whose cost of service is high, customers who purchase when demand is especially high and capacity is short and segments of customers served by competitors who tend to follow the company’s price increases.

Test #11:
What customer segments might be captive to the company?

Answer:
These captive segments are those that have a very strong preference for a component of the company’s current product package. This may include a unique Function, unique Reliability or a unique Convenience of purchase and installation.

Test #12:
What segments of customers exist where competitors cannot counter the company’s change in value?

Answer:
Competitors who do not offer a specific product system component or product price point could not counter the company’s change in value. Likewise, customers who purchase on a specific occasion often pay a price without competitors’ knowledge.

Test #13:
What segments of customers exist where competitors are unlikely to counter the company?

Answer:
In simple terms, these are segments of customers who purchase products with higher costs or who force the company to incur high costs in serving them. These higher costs may be the result of more expensive components for a Price Point, high servicing costs, greater than average use of capacity or purchasing when demand is particularly high. In addition, these segments include customers serviced by price followers.

Test #14:
Identify the major segments and supporting segments used in the following price increases:

Example:
When milk prices fell, the Ofosky Brothers Farm put the milk back in bottles and sold nostalgia along with the milk. Milk was left unhomogenized, so there's a thick layer of cream on top. Price is twice that of regular milk. Loyal following.
(SIC 2020 – 1994)

Answer:
This is an example of customer segments who are captive to the company using a unique Function segment.

Example:
Huggies recently followed P&G's price-raising and raised prices on superabsorbent diapers 7%. Both companies will have higher profits.
(SIC 2679 – 1987)

Answer:
This is a segment of customers where competitors are unlikely to counter the company’s change in value because the segment is served by a competitor likely to follow the price increase.

Example:
DEC to sell its PC model for about $4,300, the IBM PC-AT (similar speed) available for about $3,000. But DEC's compatible with its VAX machines.
(SIC 3571 – 1986)

Answer:
Customer segments who are captive to the company due to a unique Convenience factor.

Example:
As cellular service providers roll out Internet-accessible services and devices, consumers are finding that their access may be limited. Both Sprint and Cingular have begun to charge according to the amount of data transfer, rather than a fixed fee.
(SIC 4812 – 2006)

Answer:
Segments of customers where competitors are unlikely to counter the company’s change in value because this customer segment makes higher than average use of capacity.

Example:
Bounce protection offered by banks, which are charging huge fees for covering overdrafts rather than bouncing transactions, makes up nearly 30% of all bank service fees.
(SIC 6021 – 2005)

Answer:
Segment of customers where competitors cannot counter the company’s change in value because the customer segment purchases at a specific occasion where competitors do not know of the price change or simply cannot respond to it.

Example:
Organic products typically cost about 20% to 30% more than other food.
(SIC 191 – 2001)

Answer:
Segment of customers where competitors are unlikely to counter the company’s change in value customers are purchasing because the customer segment is purchasing products with higher cost components. In this case, at a higher Price Point.

Example:
In order to compete in the refrigerated trucking industry, Marten Transport is working to improve customer behavior. The company charges customers for wait time and rewards those who have worked to improve efficiency. Companies with notorious inefficiencies can see rate increases of 5 to 20%.
(SIC 4213 – 2003)

Answer:
Segments of customers where competitors are unlikely to counter the company’s change in value because the customer segments cause the company high servicing costs.

Example:
Prices for most vitamin products have been rising at about 2 to 3% a year. But wholesale prices of natural vitamin E have been rising 10% to 12% a year.
(SIC 2834 – 1997)

Answer:
This is a segment of customers where competitors are unlikely to counter the company’s change in value because the customer segment purchases during a period of high demand.

Example:
Citrus Hill was calcium fortified and by 1989 had the endorsement of the American Medical Women's Association. They charge premium prices of about 11% for the standard product.
(SIC 2037 – 1989)

Answer:
Customer segments where competitors cannot counter the company’s change in value because the customer segment requires a specific product system component.

Example:
Due to increased demand for premium alcohol, distillers are increasing the price of their premium brands to elevate their images.
(SIC 2085 – 1989)

Answer:
Customer segments who are captive to the company due to a unique Reliability in the form of brand name.

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