Reasons and Methods for Customized Pricing

Reasons and Methods for Customized Pricing

Every marketer must understand that in most cases, the value of a product or service varies significantly across individuals. For example, the value of the latest innovation in tennis-racket technology is more valued by Roger Federer than someone who is an amateur at tennis.

These are some of the main factors which cause value variation perceptions across customers and/or customer segments:

PERFORMANCE DIFFERENTIALS FOR THE USERS: Think of the tennis racket.
INTENSITY OF USE: Convenience features in an automobile will be valued more by someone using it each day for 3 hours or more.
SIMPLE MATTER OF TASTE: Some people might think that Heineken beer is the best; others might prefer a Bud.
AVAILABILITY OF DIFFERENT SUBSTITUTES: People having free access to TV-summaries of football games might not value a ticket for an actual game.
DEALS OFFERED BY THE SUBSTITUTE (COMPETITOR): If a hotel's offers "50% off for couples" on weekdays, this might create a perceived value decrease in such group for rooms at a neighboring hotel.
ABILITY-TO-PAY: A millionaire will have more capacity to pay for an expensive electronic item than someone with modest economic means.

So the (perceived) value of any product or service varies across customers. Companies should therefore consider customizing prices to these values, i.e., getting people to pay more who value the product higher. Here are four methods for such value customization:

PRODUCT LINE SORTING: This includes providing high-end products with multiple features for a high-value customer and a more basic model for lower value customers. For example, many automobiles come from "stripped" to "loaded," and customers who place high value for that option will select that option.
CONTROLLED AVAILABILITY: This involves making different prices available to different groups. Giving discount coupons to people and encouraging them to buy more is one such move.
CUSTOMER'S CHARACTERISTICS: Here the companies can look at some characteristics of buyers which can co-relate to the willingness to pay. For example, age- children- and senior citizen discounts or institutional type: end-user versus reseller prices.
TRANSACTIONAL CHARACTERISTICS: Price is tied to the particular feature of the transaction. For example the moment the airline tickets were bought. Also, the number of units involved in the purchase often impacts the price.

⇒ What are your builds and thoughts on price customization?

Sources: Dolan, Robert J. (1999): Pricing: A Value Based Approach, HBS Note, 9-500-071, Boston, MA: Harvard Business School Publishing.