Brilliant Price Segmentation – An Example
Think about your customers. What is different about the ones who are willing to pay more vs the ones who need a low price to buy? How can you charge one group more than another? Keep thinking. 
There are more ideas you haven’t thought of yet.
Here is a brilliant example. Customers who are price sensitive probably comparison shop. Customers who are not price sensitive probably just decide what they want and buy it. In the world of Internet retail, you can tell these customers apart (at least statistically).
This became clear after reading this blog from Upstream Commerce. In it, Gilon Miller points out that you can tell how your website visitors arrived at your store. If they came from a price comparison site, then they are probably very price sensitive so we want to price more aggressively. If they came from a product review site, then they probably already know they want our product and are much less price sensitive. Let’s charge them full price.
This is a wonderful example of price segmentation based on transaction characteristics.
You probably didn’t think up this one on your own (I know I didn’t). There must be thousands more opportunities for price segmentation out there. Keep thinking.
Mark Stiving, Ph.D. – Small Business Pricing Expert
Photo by Brian Watkins
I’m not sure how much I agree with Mr. Miller’s point that using a customer’s referral path to your website is a reliable means to assess price sensitivity. Why should we assume anything more than a minority of internet shoppers are not savvy enough to have multiple tabs open to product reviews, price comparisons, manufacturers’ sites, and multiple sellers, to conduct research very rapidly from multiple sources? That IS the advantage of internet shopping. This is not to say all internet shoppers must be price sensitive, but that we cannot make assumptions about price sensitivity based on their digital path recorded in our site’s statistics.
I suspect I would be considered fairly price sensitive. I like to think of it as more value sensitive, but that’s easy to debate.
Let’s say I’ve decided to purchase… a new espresso machine. First I’ll look at a couple product review sites, and determine what general price point I will justify, and narrow my choices to 2 or 3 makes and models to fit my performance criteria. I’ll probably check in to the specs listed on the manufacturers’ sites as well, and then, since these sites make it so easy to, I’ll compare sellers (not just prices). Let’s also say four sellers list the model I want at prices ranging from $449 to $499. The $449 seller has a 72% satisfaction rating, spread over 4 buyers. The $475 seller has a 98% satisfaction rating spread over 108 buyers. The $489 seller has a 99% satisfaction rating averaged over 38 buyers, but a couple of the poor individual ratings are clearly by people who don’t know anything about espresso making. The $499 (msrp) seller has a 95% rating spread over 10 people, but the one bad review dragging down the rating appears to be a legitimate gripe.
Although it might be interesting to hear your guess of which seller I would choose, that’s not really the point. My point is that I have opened 12 windows over the past 24 minutes to learn all this and more (less time than it takes to go to a single store) and 8 of those tabs are still open. The link I click to take me to my chosen retailer’s site may be located on 4 of my different open tabs and, as recorded in the seller’s statistics, is not necessarily indicative of my decision making process, including to what degree price sensitivity factored in. It was certainly a factor, but I contend the seller cannot reliably determine how much by the referral link I used.
Maybe this is atypical, but given the specific advantages and reasons for internet shopping (numerous beyond price comparison), I think it’s too common to draw reliable conclusions about shoppers’ price sensitivity based on their referral paths. I know plenty of customers who normally might be considered toward the lower end of price sensitivity, but will still consider price because the internet makes it so easy. Yet, those of us who are more price sensitive may become somewhat less so when we have information readily available to help assess value. None of this is necessarily good or bad… but maybe an indication of why a referral link may not be a reliable means for drawing conclusions about our customers’ decision making sensitivities.
I think, by nature of the internet and what it offers, the typical internet shopper is going to ACT price sensitive even if they are normally less so, regardless of what the referral link indicates.
I certainly see your point, Brian, but I do think it’s the sort of thing a web store operator could easily test… when in doubt, run a pilot.