Today we’ll explore a fun example of price segmentation: coupons. Let’s look at their usage through the lens of our price segmentation glasses.
Remember, price segmentation requires two steps:
1. Segment the market
2. Create a pricing mechanism.
Segment the Market
Coupons segment the market into two distinct groups: people who want to invest time and energy to gain a lower price, and people who are not willing to do this.
Despite what it seems, price segmentation is not entirely black and white. Few people always use coupons, and most of us would be willing to use a coupon if it was worth enough. For example, most of us don’t use coupons to save a dollar on a grocery item, but I would wager most of us would be willing to use a coupon for 50% off a new car.
The two segments are comprised of those who believe the effort is worth the value of the coupon, and those who don’t. Another way to think about this is it segments people who value money more than time vs. people who value time more than money.
Create a Pricing Mechanism
In this case, the coupons are our pricing mechanism. Most people pay full price, but those who are willing to put in more time and effort to use a coupon receive a discount.
There are countless websites where you can find coupons you can use for just about anything. Do you use them? If not, why not? Think about who visits these websites the most people who are price-sensitive, and are willing to put in the effort to get a better deal.
REMEMBER: As a general rule, price segmentation works by charging the majority of the customers a standard price, and then giving a discount to people who can prove they are price sensitive. Pricing mechanisms are the methods by which our customers can prove they’re price sensitive. In this case, obtaining and using a coupon is proof. In the previous example, we looked at students who had to show their student I.D. at a cinema to prove their price sensitivity.
Coupons as a Form of Price Segmentation
In summary, coupons are an effective pricing mechanism to determine customers who are price sensitive so they can pay a lower price. We can be confident they’re price sensitive because they’d rather invest time and energy to find and use a coupon, rather than pay full price.
The action you can take
Does it make sense for your business to offer coupons? Will buyers who are price sensitive use them, while the majority will not?
P.S. – Coupons are also used for reasons besides price segmentation (e.g., a common goal of coupons is motivating new customers to try your product). However, the purpose of this article is not to evaluate coupons in general, but to show how they’re used in the context of price segmentation.
Tags: pricing foundations