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LET YOUR CUSTOMERS SEGMENT THEMSELVES BY WHAT THEY’RE WILLING TO PAY | IMD

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.

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LET YOUR CUSTOMERS SEGMENT THEMSELVES BY WHAT THEY’RE WILLING TO PAY.

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