Segmentation in marketing means dividing up a large target audience into smaller groups for efficient marketing and promotions. Product segmentation is a common approach in which you divide customers into groups based on potential use and interest in your products. Price segmentation is an alternative technique in which you segment customers based on price to optimize revenue and profits.
Price segmentation includes a variety of techniques aimed at getting the most profit possible form each customer. In hospitality, for instance, hotels, airlines and transportation companies charge premium prices during holidays or peak travel seasons because customers are willing to pay more. Similarly, airlines get more money from customers who pay more for first class seating. If effectively implemented, price segmentation optimizes revenue and profits. Advanced software systems often are used to adjust prices in real time or to set ideal price points over time.
Critics of price segmentation say it is nothing more than price discrimination -- companies taking advantage of customers in a position of great need who will pay to get that need met. You run the risk of alienating customers at either end of the spectrum. Premium customers may get upset if they are aware others are getting the same or similar products or services at lower prices. A customer paying a lower price may be offended if he sees others getting a better experience, even if they paid more money.
Product segmentation strategies target customer groups based on different needs or interests rather than price. For instance, cellphone retail outlets target customers looking for advanced media capabilities differently than they do customers who want basic phone and texting packages. This segmentation approach allows a company to reach a larger total market by offering different product or service benefits to customers who want different things. You also can generate higher profit margins by customizing solutions that best suit each customer.
The costs to promote variations of a product can be expensive because you must target each market segment individually. You actually may invest more than is necessary by trying to be too precise. If you make two separate product offerings for two markets that both could be satisfied with one, your segmentation isn't cost-effective. Multiple product offerings and variable promotional messages also go against efforts to build a consistent and recognizable brand image for your products.
