Pricing for a ‘Segment of One’
The online market for goods & services is already governed by a different set of pricing rules. How will that affect the traditional modes of looking at pricing?
Classical marketing text books offer us some standard ways of approaching pricing and those are still being taught in business schools. So it was refreshing listening to understand the new paradigms of pricing from Professor Krishna Palepu of Harvard Business School at a session organised by HBS Club of India recently. The new way to approach pricing may have nothing to do with the traditional methods and may be they are just a variation of the tried and tested methods. I will leave it for you to take the final decision.
Professor Palepu’s argument was that we are now right in the middle of the age of ‘Individual Pricing’. The ecommerce merchant and pretty much anyone selling on the internet, knows each and every consumer and can titrate the price to the individual person’s past history. And this is in a sense Price Discrimination of the worst kind. Does it have a very bad effect on society? Or does it serve a good cause?
Professor Palepu’s argument was that price discrimination of this kind has a socially beneficial effect. While there is someone out there paying a high price, the merchant can use that extra margin to price the product low to someone who is yet to get on to the bandwagon. By bringing more consumers into the product or service, the merchant is ending up creating a better volume game, that may end up benefitting all the consumers, not just the person who got on to it at the last stop.
There are in reality three degrees of pricing at work. There is the first degree that works on price discrimination. The second degree works on building loyalty. The third works on a segment of one.
A lot of the pricing is happening through advanced algorithms with bare minimum human intervention. Uber’s surge pricing is a live example. Ecommerce brands have invested heavily in working towards a pricing strategy for a segment of ‘one’. You may have experienced it already as you navigate your online purchases. Try booking an airline ticket from a travel portal, not down the price. Exit the portal. Get back on to the portal an hour later or a day later, and you may be getting a different price, depending on how advanced the algorithm is and the inventory position.
Except may be for movie tickets which are fixed by day and show, all other products and services are today priced to serve the ‘Segment of One’.
When operating on the Segment of One paradigm, companies are trading off the concept of ‘Cost to serve’ with the customer’s ‘ Willingness to pay’. And we are in for an era of more price discrimination, as pointed out by Professor Palepu.
So what should companies do to better prices? Gouge the loyal customers and offer lollipops to newbies? Will that be sustainable in the long term?
In the article Customer-Based Strategies for Raising Prices in Marketing News [November/ December 2016], Professor Vikas Mittal of Rise University has observed ‘Raising prices can be difficult. By linking price increases with only to increased product performance, more features and higher value, firms may set themselves up for a vicious spiral of higher costs and higher prices. This can lead to feature fatigue, which can confuse and irritate customers. Raising costs can also erode long-term competitiveness…. By expanding and linking their pricing tool kit to brand equity, customer satisfaction, customer identity and market factors, firms can view customers as complete human beings. These factors when integrated into your pricing strategy, can build a longer-term approach to managing and mastering price increases”.
The era of pricing for a Segment of One is upon us. The company that understands this better can score a big win over its competitors and build a loyal base of customers. The trick will be to understand customer identity and their specific needs. By doing this companies will be able to remove unwanted features and create a mix that is ideal for each consumer. A mix that can be priced to ensure margins are very high. They can then create package that can help them attract new buyers, without bleeding too heavily. Multiply this by a factor of a thousand, or may be several thousands, and you are left with a pricing strategy that can work across terrains: Segment of One multiplied by a few million.
Ambi M G Parameswaran is an independent brand strategist, author and founder of Brand-Building.com. He can be reached on ambimgp@brand-building.com