How is price used to segment markets? (+Services)

Setting prices can be difficult for anyone, in virtually any industry. 

This is because cost structures are different from company to company, product developer goals vary, and the competition provides pricing variables -- and in many industries, retail pricing may change daily.

But one critical pricing factor remains very reliable.

And that is following the market.

In setting your prices for market segments, the first two big questions to answer are: 

1.) What is going in the market right now, and 

2.) What value does our product provide as it relates to what is going on in the market? 

With answers to these questions, we can begin to uncover the customer demographic information and the psychological topics so we can optimally match the price structure to the market. 

Simultaneously, this is what sets the foundation for the Marketing Mix. Let’s now dig deeper into setting prices.

A fantastic 4-step basic model for pricing starts with: 

1. Main internal objectives -- knowing what the organization wants to achieve from the pricing structure is a good first step in the analysis. If the company has to make a 10x return on every product, even at the onset, this sets the framework for the pricing structure and choosing the market segment. On the other hand, if the company can give a free or discounted product in order to win customers, this also affects the pricing strategy.
2. Value positioning -- your value positioning is a fundamental business model decision that serves as the core product positioning strategy a company chooses to separate themselves from the competition. From materials used, to packaging and market demographics, the value is intimately tied to the price of the product or service. If you choose to be the low price leader using lesser quality materials, this impacts the perception of the value you are communicating. Alternatively, if you choose to be the highest priced solution, the value proposition needs to be clearly matched to the market to communicate price point value.
3. Analyzing cost structures and profit potential -- an important focus for any product developer is understanding their cost structure and profit potential. Many companies use a cost-based pricing structure, but regardless, the profit margin must be clearly understood to find break-even points and to set objectives.
4. Setting the initial price and then remaining responsive to the market -- whatever price you decide to enter the market in, it’s very possible that the price points change over time. At the end of the day, you need to test the marketplace and regularly try to find the ideal price point. In Ecommerce, it is normal to acquire a customer at a retail price point of $59 (as an example) and then upsell the customer on a 2nd purchase for $49 (as another example), and then in 2 months sell the customer at $69 for the same product with added value. The point is, price points can be fluid, ever-changing. The most important activity is to be constantly searching for the optimal price point. Additionally, it’s very common to enter an existing marketplace with a low price offer to acquire a customer base  and then boost prices over time.

Typically, lower-priced products and services serve customers who have lower expectations, and higher-priced products may cater to customers who automatically associate a higher value. 

With that, branding and brand equity can substantially affect the price and segment placement of the product. Good examples are Tiffany’s, Rolex and Rolls Royce who clearly sell to specific market segments.

Why are services more difficult to price than goods?  

Services are intangible, with varying practices and little consistency across respective industries. 

Think about financial services, auto care, personal training, massage therapy, lawn care, plumbing, housecleaning, roofers, electricians on and on.

The range of services, quality, pricing, and professionalism is all over the map.

Services require more conceptual distinguishing factors to create the marketability of the offering. 

This requires marketers to think creatively and “out-side of the box” in order to more closely relate the wants and needs of the customer to the service. 

With that, this also creates more variables for setting pricing structures. 

Consumers have a hard time in evaluating the services, prior to purchase, which can lead to potentially unscrupulous pricing or performance issues as in the case of legal or health care services.

What's the best way to price a service?

First, let’s assume you are a new massage therapist. And knowing that massage is generally a service that is first to be cut from the household budget when cash flow is tight, you have chosen a high-end neighborhood in a high end zip code to acquire customers. 

To begin, you are just one more voice in what is probably a crowded marketplace of service providers.

Step 1 is to decide how you will position yourself. Start by listing all the things you can do that customers expect you to do. Then, focus on making yourself unique. Want lots of customers? Be the low price leader and deliver more value than the competition. And communicate this. Slowly increase prices.

Or, you could start off with high price points, that is, if the competition is charging $100 per session, you could charge $200 assuming your market segment sees the value in what you are providing. Most services are price elastic which means the higher price points do not gain as many customers, so choose your market segment carefully, especially if you want to charge higher prices.

What additional elements must be considered in the marketing mix for services?

Additionally, services that are bundled with products, or hybrids, must be carefully analyzed for not only setting the pricing structure but also in developing the marketing mix. 

Communication of the value proposition must be carefully thought through because a service proposition can present added opportunities for the organization. More so than just selling a product in a competitive market. 

Such is the case of IBM who’s once hardware-heavy model gave the service free, but changed that value proposition as their model changed, completely affecting their marketing mix.

Service providers also have many wonderful opportunities to gain customers by selling the added value through offering a guarantee. If you offer a money back guarantee, this makes it dramatically easier for a customer to say yes.

Additionally, you must sell the benefits of your service, that is, customers want a quality result and your job is to sell that result. These will help you develop your marketing mix.