OnDemand WTP Pricing Research

Let Your Customers Segment Themselves by What They’re Willing to Pay | HBR

The late Sir Colin Marshall, when he was CEO and chairman at British Airways (BA), knew that success in his business came down to superior value capture. In a 1995 interview with HBR, he summed up the opportunity brilliantly: “You’re always going to be faced with the fact that the great majority of people will buy on price. But even for a seeming commodity such as air travel, an element of the traveling public is willing to pay a slight premium for superior service …. In our case, we’re talking about an average of 5%. On our revenues of £5 billion, however, that 5% translates into an extra £250 million, or $400 million, a year.”

If you’re out to capture more value, one surefire tactic is to figure out a way to charge different prices to customers with different willingness-to-pay (WTP). Economists sometimes call this “price discrimination,” which sounds bad since discriminating against people is generally illegal, not to mention immoral. However, most of us encounter forms of price discrimination frequently that don’t bother us. For example, who begrudges the discounts afforded to senior citizens and students? (Well, all right, I have occasionally felt a tinge as I see my retired neighbors driving much more expensive cars than mine.)

But charging different customers different prices for the same or a similar product or service is tricky for reasons having nothing to do with ethics. First: it is not easy to identify and group customers according to their willingness to pay. Second: if you have different prices in the market for a similar product, there is no preventing your well-heeled customers from taking advantage of the lower prices, too. Often, a marketer will try to scoop up sales from more price-sensitive shoppers (without cutting margins for its best customers) by launching a second, lower-end “fighter brand.” But customers are smart, and this often invites another serious problem – indeed called by one of the scariest terms in the management vocabulary: cannibalization.

Read complete article here:

Let Your Customers Segment Themselves by What They’re Willing to Pay.

4 Comments on "Let Your Customers Segment Themselves by What They’re Willing to Pay | HBR"

Trackback | Comments RSS Feed

Post a Comment

WP-SpamFree by Pole Position Marketing