Let us take a simple example of pricing for high-speed Internet. Cable Internet providers could offer just one version of service at one price. Most offer 2-3 versions that vary in speed (Mbps) and hence offered at different prices. Speed is one product attribute and its relative utility varies across different customers. The pricing has always been a subscription model – customers pay a flat monthly fee and are allowed to consume as much service as they want. Different customers get different value from the service – based on how much they consume (measured by Downloads in Giga Bytes) . The market has not been segmented along Download dimension.
If Subscription pricing is at one extreme, Usage based pricing is at the other extreme. Customers are charged per use, for each download. In this model each customer pays for what they get. This is almost infinite segmentation but not an easy one to practice and it does not take into account the value to customer from the service. By metering usage, the service is treated as a commodity. If the marketer can find the value of a given Speed – Download pair they can define multiple versions at different price points instead of a metered pricing.
AT&T is using both Speed and Download to deliver different versions at different price points. The data in the graph comes from here.
There are several factors that stand out here:
- AT&T has six different versions. These may have come from their customer analysis but all these versions may cause confusion to customers. But six seems a bit too high. Customers may not also understand what the large download and speed mean – which one of the six is right for them? It is not a simple choice.
- Notice how the price is in congruence with the two attributes along the diagonal. As expected the price increases as we move along the diagonal. It is expected that need for speed goes in hand in hand with large download capacity. For example, people download large movies and want this in less time.
- Price sensitive customers can move along the band (down or up) based on their economic conditions without switching services.
- AT&T charges overage for those who exceed their download allocation for the version they chose. This however only allows those in a given version move up in download direction and is too restrictive.
But most interesting to me are the regions outside the diagonal band. Notice the holes in top left and bottom right. Just because holes exist in a segmentation strategy it does not mean it must be targeted. What would the price look like for these two segments? Are there sizable number of customers in these two segments? If yes can AT&T target them with more versions without confusing the “diagonal” customers? Do these holes open up opportunities for competitors to enter the market? If yes, why didn’t AT&T choose not to go after these segments? What do they know that competitors don’t?
If marketing is about segmentation and targeting, strategy is about making choices – choices about how to effectively apply limited resources to maximize profit.