Segmentation Based On Purchase Occasion

It is relatively easier to target segments that are static with time – by that I mean, customers will stay in their “assigned segment” if not for their lifetime but for a much longer period. The extreme example is gender as segmentation variable.  A marketer can target the resources accordingly and can measure its effectiveness. But how can a marketer target  customers when at any given time the customer could be in any one of the segments?

I think the Danish word for this is  -Vaelg!  The English word is Versions.

Here is what Scandinavian Airlines does to target its customers,

Sometimes you want comfort, sometimes you want lowest prices and sometimes both. Fly our Business, Economy or Economy Extra – whatever fits your needs best. By the way Vaelg means choose in English

Please Self-select yourself!
Please Self-select yourself!

One last point – notice how they do not show any price in these options. This is applying consumer behavior principle of getting customers to commit emotionally before they see the price. This is a pricing tactic that works well with the chosen pricing strategy.

All in all a very good execution by SAS.

WSJ Charging For Mobile Version

If you are used to reading complete WSJ articles on your Blackberry of iPhone, the end is nigh. Starting third week of January they are going to charge for mobile access.

A mobile only subscription will cost $2 a week. For those with either a print or subscription, the cost will be $1 a week. People with both print and Web subscriptions will get full mobile access for free.

I think it is a great idea to charge separately for the mobile version. But the pricing is not perfect and needs adjustments to maximize profit. Let us analyze this deal and the prices of rest of their offerings (print, online only and the bundle) to see if there is room for increasing profits.

Print + Online Print Only Online Only Mobile Only
Weekly price $2.69 $2.29 $1.99
Weekly mobile price $0 $1 $1 $2
Total $2.69 $3.29 $2.99 $2

The first observation is for those who are considering Print Only or Online Only subscription and need Mobile version, the most cost effective version is the Print + Online version at $2.69 a week. This indicates pricing inefficiency in their current Print+Online bundle. This is something they should have fixed even before the  introduction of pricing for Mobile version.

Who are the Print Only subscribers? Businesses, libraries, and some individuals who still prefer whatever convenience the print version offers. These segments get little or no utility from Online version and are unlikely to switch to Online Only version because of the higher price of Print only version.  While the 40 cents incremental cost to add online access  makes sense, the base price of the Print Only version leaves more consumer surplus than necessary. The Print only version can be priced higher than its current levels.

Who are the online only subscribers? Mostly individuals, the wired segment. For most of the sub-segments in this category, there is little or no utility by adding Print version. For some, this may even be negative utility. However for those who want the print version added to their online version, the utility they get from it is high. Hence the incremental price to upgrade to the bundle can be more than 70 cents they are charged today.

Who are the Mobile only subscribers? For people on the go with smart phones there is considerable value from the mobile version, more than the current $2 price,  but WSJ is prevented from capturing all the value because of the reference price set by their Online only version. Even though it is cumbersome, people can simply read the journal using the browser on their mobile phone, using their online subscription. So the $2 price for Mobile only version makes sense.

What about the price for adding Mobile version to Print only and Online only subscribers? For Online Only subscribers, the $1 is most likely the right price. I bet WSJ’s customer data showed that most of their Online Only subscribers will simply use the mobile browser instead of paying separately. In other words a very steep demand curve, with demand falling sharply after any price more than $0.  So the high $1 price for adding mobile version delivers more profit for WSJ than a lower price.

But for the Print only subscribers, those who did not even prefer reading the online version the incremental utility from mobile version is low. I believe $1 price for these subscribers is not the profit maximizing price. The price lies somewhere between  a few cents and  40 cents (the incremental price for adding Online version to Print Only subscription).

Why not give away mobile access for free to the Print Only  subscribers? Because this would make the print only subscribers who will never prefer adding mobile version think that they are paying for something they do not use. So the incremental price for adding Mobile version to Print Only subscription has to be more than $0.

The net of this is, it is a great idea to charge for mobile version. But the prices need adjustments to maximize profit. While they are at it they should also fix the pricing for the print only subscription.

Protected: Effect of $0 Price of Digital Content

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Small Business – Big On Price Management

Effective Price Management – Nestle is doing it, P&G is doing it, Victoria Secret is doing it and these are definitely not small businesses. Now, smart small businesses, despite facing recession and decreasing customer demands, are adopting effective price management.  Here are two businesses featured in WSJ Insights Entrepreneur Roundtable and their pricing strategy and tactics:

Versioning: If one price is good, two prices are better. Versioning is about understanding that your customer segments and delivering them a version that adds value at a price point they are willing to pay and profitable to you. Bud Konheim, founder and CEO of Nicole Kim, says:

In July of 2007, I saw what was going on and I had a choice: lower the prices and compete that way, or go back to the philosophy that we have, which is design, design, design. You know, competing by price, the winner gets zero. We didn’t want to do that. But we are known for special-occasion dresses, so I introduced a new category called Daytime Dresses, which was a cover for making lower-price stuff. So I had two of these things going, a lower price and a higher price.

Using cost signals for price increases: This is a pricing tactic that helps address fairness concerns when a marketer wants to increase prices. Lida Orzeck, CEO of Hanky Panky Ltd, says

On June 1, 2004, we raised the price to $18; I think maybe it was $17 earlier. And then five years had passed and near the end of ’08, we had a plan to increase the price. We let everybody know and explained why—all of our prices have gone up, for materials, labor and so on.

Further reading:

  1. five steps to effective price management for small businesses,
  2. Price increases when demand shrinks
  3. Bottled water prices

Another Case of Free Reference Price

Spotify is an online streaming music service that allows users to listen to free music with Ads inserted into the stream every 20 minutes. They also offer a premium version that has no Ads. In the terminology used by Mr. Chris Anderson, this is freemium. Whatever the name is, it is a case of tried and trusted pricing scheme, multi-version pricing. Points critical  to multi-version pricing are correctly designing the versions to match the different segments and defining version boundaries so that customers self select themselves to the right version targeted at them.

In case of Spotify, its versioning is neither done based on segmentation and targeting nor are the version boundaries defined correctly. The Wall Street Journal says,

Chief among the concerns: Similar services have tried and failed to crack the market for streamed online music, unable to generate either sufficient advertisers to support free content or enough consumers willing to pay a monthly fee.

The free version serves the needs of almost all segments. Despite the interruptions, the customers see net positive value in using it over the paid version. Even if there is value in using the premium version, the $0 price for the Ad supported version has set a bad reference price that is difficult to escape.  The attraction of building subscriber base, even those free users, is always attractive because of the potential to monetize them.The WSJ story adds,

To make it in the U.S., Spotify must not only find advertisers for its free service, it must migrate between 5% and 10% of its users to the premium service, said Mark Mulligan, vice president of Forrester Research Inc.

“A lot of consumers out there don’t see this as anything other than a way to get free music,” said Russ Crupnick, vice president of research firm NPD Group.

But the problem is customers can stay happy with free version longer than the business can stay solvent (hat tip to Keynes).

It’s Not What It Costs You It’s What Your Customers Value

Whether you are a small business or a large corporation marketing means Segmentation and Targeting. Marketing is about finding what is relevant to each segment and delivering at a price they are willing to pay. There is nothing more to it. It is however easier said than done. It does come  easy to companies like P&G that have done it for so long, institutionalized the process, has the resources to conduct customer research, gather insights and invest on new product lines to monetize those insights.

Not all can afford such unfettered access to intellectual or capital resources.

I saw a post by an artist, Ms. Michelle Moyer, of White Dog Studios, who makes and sells jewelery. Michelle is thinking about pricing her wares correctly. She says,

I think that artists undervalue their work far too often. When I go to shows or browse online and see handcrafted pieces selling for a price that I know will barely cover material costs, if at all, I cringe because this sets the market lower for my work. I believe that my work has value and that incorporates not just the material costs, but the time it takes for me to develop the design and make the piece.

I want to highlight a great point that Ms.Moyer intuitively figured out, it is the effect of reference price. Customers do not know the absolute value of the crafts. There is not a universal system that tells us how much we value Ms. Moyer’s craft’s vs. others. We look at prices relative to available options. While there is no common value for crafts, presence of lower priced competitive items sets a lower reference price for her customers.

Ms. Moyer  talks about rest of her pricing in terms of material costs and labor costs, and about how much artists value their work. Pricing is about capturing a share of the value you create for your customers. Your costs are irrelevant to your customers. Pricing needs to be based on value added to customers. It is not about what you value or what you think the value is, it is what your different customers think.

The value is not the same across all customers. In the book Game Changer, retired CEO of P&G Mr.A.G.Lafley talks about “who is your WHO?. The “WHO” refers to the customer. Mr.Lafley, goes on to say

“As you work to better understand the WHO, you’ll discover that people use your product for different reasons. They may have different occasions for when and how to use it; differences about what they think is a good value, and what they are willing to pay. One size does not fit all”

Ms. Moyer  is practicing a type of multi-version pricing,

I try to offer a range of pieces at various prices. For example, this bracelet, for sale on my Etsy shop, is only $20, which I believe is a fair and affordable price. This bracelet, on the other hand, took much longer to design and create, so it is priced at $70.

This is good but her  multi-version pricing is once again based on her costs rather than on segmentation or customer value. Taking a lesson from Game Changer, there are opportunities to find  the reasons people buy the bracelets, different occasions and how the customers use the bracelets.

It is not easy when you are a small business  who cannot afford to hire someone to do strategic marketing or invest in doing customer research or segmentation studies. Even a simple pricing of just one version of your product gets harder  when you make products that have no “common value”.  So the easiest route seem to be producing what is easy to you or pricing it based on your costs.

But it does not have to be as rigorous and formal as it is for a multi-billion dollar giant like P&G.  You can solve 50% of the problem by simply  starting a conversation with your customers.

This blog  and I can help you get started on the right type of customer conversation and finding what they value.  Write to me.

Related article: Small Business pricing.