Erecting effective hurdles is the key to differentiated pricing
In an interesting pricing article published yesterday in the Wall Street Journal, authors Detlef Schoder and Alex Talalayevsky make the point that companies have lost control of their pricing power due to the power of the internet. The article titled The Price Isn’t Right lists eight different tactics that companies can use to limit the damage of using discounting as a pricing strategy.
Their second tactic--Embrace, but try to limit the bargin hunters-- contains this advice:
The object of each of these tactics is not to eliminate deep discounting. Fire sales are obviously necessary sometimes. With that in mind, companies will find a receptive audience on the Web sites that cater to bargain hunters. They just need to set some limits. They can offer coupon codes that are only usable a set number of times, for example, or discounts for a limited time and available only to users of the sites. This way a company can better manage how much of its product it will sell at the deepest discounts. Dell Inc., for one, regularly issues coupons at deal sites, but the coupons can only be used a fixed number of times.
When using coupons as part of your pricing strategy, you need to set up hurdles so that only your most price-sensitive customers can take advantage of the discount offer. Sometimes this means that customers have to physically ‘clip’ coupons and then redeem the offer; sometimes it means that you offer discounted services only during certain times of the day (early-bird specials at restaurants) that will appeal only to your most price sensitive customers; and sometimes you make them join (or opt-in) frequent shopper lists where they only receive the discount if they’re a member of this list. No matter what tactic you use, you need to make the hurdle large enough so that there is no spillage between your best customers (who are less price sensitive) and your target customers (who are presumably the most price sensitive). You want to set the conditions so only your most price sensitive customers will achieve the discounts.
Another way to erect the necessary hurdles is by including other necessary services. Let’s take shipping for instance. Your best customers may not care about a shipping discount that delivers the product a few days later than normal. But your most price sensitive customers will care, and they will happily accept a discount in exchange for a few more days of waiting for the product. If done correctly, applying the discount to the shipping portion of your service is a smart way to prevent spillage.
And finally, here's a tactic that supermarkets and big-box membership outlets use all the time. Rather than applying the discount to the product with no caveats, these stores now offer quantity discounts that only apply if large quantities (or large sizes and volumes) are purchased. The classic case that I run across all the time at my local supermarket are the advertisements for Coke or Pepsi where a standard 12-pack case will be priced at $4.50 but you can buy 4 cases for $12 (a discounted price of $3.00 / case). The hurdle here is that you must buy four cases to get the discount - if you buy any less than four, the discount doesn’t apply and the cases are sold at the regular price. You see this type of hurdle erected for quantity discounts as well as volume discounts (that regular bottle of shampoo is offered with no discount, but the 2 quart version of the same shampoo is sold at a discount).
Here’s the takeaway: Building effective hurdles is the best way to prevent your best customers from taking advantage of discounts targeted at your most price sensitive customers. These hurdles must be large enough to prevent any type of spillover, but not too large to prevent the discounts from being used by your target buyers.