Question on Building a Fence in Price Segmentation

I always enjoy hearing from alumni who have taken the Pragmatic Institute Price course:

I was in your Austin Class last May. It was fantastic, and I had a question on price segmentation for software. Our company is successful in the B2B market, but is attempting to focus on a specific segment (IT service providers). The issue is that we are selling the same software but have changed the pricing model to suit the specific market need, which is different from most businesses (sell by number of sites they use us to provide a service to rather than by the quantity of usage for a specific customer). It is two prices for the same software, so how would you stop a prospect from comparing both pricing models and simply choosing the cheapest for their specific use case?

First, congratulations on implementing price segmentation. There are many ways you can build “fences” so one buyer doesn’t buy at the other market’s price. The most common if you use a direct sales force is that you give both markets the same list price and allow the salespeople to discount one market more than the other.

However, you say you use a different pricing model for each market, which implies you charge for something different for each market. Presumably, the metric you charge for is highly correlated with how that market receives value. It sounds like you charge for number of sites to one market, so let’s call that market A. We’ll call quantity of usage to the other one market B.

Sometimes, we are lucky and things just work out. If market A uses much higher quantities than market B, then market A would be happy to pay based on number of sites. Similarly, if market B supports more sites than market A, then market B would be happy to pay based on usage. I’m guessing you’re not that lucky.

The next, relatively easy solution is to create two separate products. You put a different skin on each one even though they are identical under the hood. If you can find some features that only market A cares about, turn them off for market B’s product (and vice versa). Alternatively, you could just create data sheets that describe the features you get with one product versus the other, even though both products have all features.

The goal is to make it so anybody in market A wants to buy using that pricing model based on sites and anybody in market B wants to buy using the pricing model based on usage. They should not perceive that you’re forcing them—rather that they have a choice and the rational choice is the one you want them to make. Hope that helps and thanks for the interesting question.


Mark Stiving

Mark Stiving

Mark Stiving is chief pricing educator with Impact Pricing LLC. Connect with him on LinkedIn

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