Lower Costs Do Not Mean Lower Prices
Saturday, December 13, 2014
A bit of advertising caught my eye. It detailed a limited-time promotion for a "six pack" of individualized golf lessons.
I have some serious doubts about the sign. Not only did it contain a typo - a comma instead of a period in the regular price of a "junior game enhancement pack," but it didn't explain the product being offered at all! Nevertheless, I am duty-bound to give the company praise for making use of one of the most powerful techniques in all of pricing theory: customer segmentation.
You'll notice that lessons for younger folks cost a mere $97.49, while adult lessons cost a heftier $172.49 (a 79% premium!)
Many non-economists would assume that the adult lessons are priced higher because they cost more for the store to offer. This line of reasoning can easily be proven faulty.
- All classes are held in the same facility.
- The instructors are all the same.
- The equipment is likely of similar quality.
- The form and techniques being taught are the same.
So who gave the store managers the right to sell what is essentially the same product at different price points to different customers?
Nobody. The store marketers never need permission. All they required is a basic understanding of pricing economics.
What are some of the big differences between adult students and junior students?
- Ability to spend - Adults with young children are more likely to be cash-strapped than adults without them. Thus, lessons targeted to these potential customers should be priced lower.
- Willingness to spend - Adults buying lessons for themselves are likely to view the training as a means of self-improvement (or career-advancement), while adults purchasing lessons for their children are more apt to think of the classes as merely a fun diversion for their children. As a consequence, they will be willing to spend more for themselves rather than their children.
Never make the rookie mistake of thinking the you have to segment by product features. Segmenting by customer often works well and can be quite easy to do.
If you're having trouble pricing your products, make sure to pick up a copy of my software pricing book or contact me for a private pricing consultation.