Price, Time, and Effort: Segmenting Buyers by Willingness to Pay
Pricing Pointers, Issue #6
Often the value of a product or service depends on when it is purchased and/or used. (I say “and/or” because the time of purchase and use aren’t always the same.)
If you sell such a product or service at a single price, regardless of time, you are leaving money on the table.
This is because some buyers are willing to pay more than your asking price. But they don’t have to. Others are willing to pay more than your cost but less than your asking price. But you aren’t giving them the opportunity.
Time-dependent pricing is when the price that is charged depends on when the product is purchased or used. The objective is to segment buyers by differences in their willingness to pay for (or at) a particular time. If you succeed, you'll increase your sales and profits compared to charging everyone the same price all the time.
You do this by giving buyers options. They can either pay more to get a more desirable time or pay less by accepting a less desirable time. This trade-off between what buyers pay and what they get is crucial! It’s what will keep every buyer from picking the lowest price.
Nudge buyers to off-peak times
Suppose your business consistently has more demand for your service at a particular time than you can handle. One way to manage this is to build more capacity to serve. But it’s faster and cheaper to shift the excess demand to underutilized times – to use your existing capacity more effectively.
Does everybody want to rent your lakeshore cottage in July, but April has openings? Consider this. Raise the rent for July relative to April. Frame the relatively lower rate for April as a way to enjoy your beautiful property at a saving.
Make buyers wait to pay a lower price
Price-sensitive buyers are willing to delay their purchase until the price goes down. They are willing to wait until it goes on sale, it’s marked down, a cheaper version is released, etc.
“Don’t want to pay $20 to see our new movie? Wait until it hits the second-run theatres (or goes to streaming).”
I previously wrote about the Good, Better, Best Pricing tactic. Here’s a related spin on it.
Rather than release all of your versions at once, release them sequentially, starting with your Best version. The idea is that the buyers most eager to purchase will also be the least price sensitive.
A classic example of this tactic? Booksellers who release a hardcover version of a title first, followed by a cheaper, paperback version.
Make buyers suffer (a little) to pay a lower price
Offer a lower price only to buyers who are willing to accept some sort of inconvenience.
Some buyers are money-poor, but time-rich.
This means two things. First, they are more price-sensitive than other buyers. Second, they are willing to accept some inconvenience if they can pay a lower price. They'll spend their time to avoid spending their money.
Other buyers are time-poor, but money-rich.
They have greater ability and willingness to pay for things that free up more time in their lives. That makes them less price-sensitive. They’ll spend their money to avoid spending their time.
If you want to find out who's who, do this. Make buyers sacrifice their time in some way in return for a lower price.
“Want a great Black Friday deal on a new TV? Get up super early in the morning, and wait in line outside our store in the cold. Supplies at this price are limited, and it’s first come, first served. Want that TV really badly? Maybe you should camp out overnight so you’ll be at the front of the line when the doors open.”
Imposing a cost of getting a lower price, in terms of time and effort, is key to using this tactic. Every buyer has the same option to save money by spending their time. But not every buyer will find the option equally attractive. “I can save a dollar if I complete and mail in this rebate form? Nah, it’s not worth the hassle.”
Concluding thoughts
The pricing tactics in this article are rooted in the understanding that the value of any product or service is subjective. It depends on who you ask and when you ask them.
Using tactics like these will help you accomplish two things simultaneously. First, capture more revenue from customers who value certain times more highly. Second, provide more affordable alternatives to budget-conscious buyers.