Effort-Based Price Discounts: How B2C Companies Segment Customers and Maximize Profit Without Across-the-Board Price Cuts
Pricing Pointers, Issue #17
Effort-based price discounts are a powerful B2C pricing strategy that helps businesses segment customers and maximize revenue. This article explores what they are, why they are used, and how to implement them.
What are they?
An effort-based price discount is a pricing tactic where a seller offers a reduced price to all buyers, but requires them to accept some inconvenience or non-monetary cost to get it. This inconvenience can involve time, effort, or flexibility.
For example, coupons work as a price segmentation tool. This is because they require time and effort to use them. This includes looking through flyers, collecting the coupons, bringing them to the store, and remembering to hand them to the cashier.
Why use them?
The primary purpose of effort-based price discounts is to separate price-sensitive customers from price-insensitive customers.
Price-sensitive customers are those who value their money more than their time. They are willing to make the required effort to get a lower price.
Less price-sensitive customers, on the other hand, value their time more than their money. They will pay full price to avoid the inconvenience or hassles attached to the lower price.
This strategy allows businesses to maximize profit and attract price-sensitive buyers without cutting prices indiscriminately for everyone.
It also reduces the chance of cannibalization, which occurs when full-price customers take advantage of discounts not intended for them.
Effort-based price discounts are generally perceived as fair because both the list price and the discounted price are available to all customers.
How to use them?
To effectively implement these discounts, sellers should make them available to all. However, they must require the customer to make some sort of effort to obtain the discounted price. “No hassle, no discount.”
Common methods and examples include:
Coupons and promotion codes: These require active searching, saving, and redeeming, as they are time-intensive activities.
An exception to this are in-store coupons. These are typically placed on the package, so the effort required from the shopper to use them is minimal.
Mail-in or online rebates: These require the customer to either fill out a paper form and mail it in, or go online and claim their rebate digitally. Either way, the buyer must endure a certain amount of hassle to receive the rebate.
Instant rebates are excluded for the same reason as in-store coupons, as they require minimal effort to get the reduced price.
Queuing or waiting: This involves requiring customers to queue, either physically (e.g., Black Friday sales where buyers queue for hours to get limited specials) or via waiting lists.
Another form of this is when book publishers release a cheaper paperback version months after the hardcover edition is released.
Out-of-the way locations: Businesses offer lower prices at less convenient locations, such as outlet stores.
Outlet stores are often miles from urban areas and may have uncertain inventory. This requires travel effort and risk on the part of the customer.
Price match and price drop adjustments: These are also forms of effort-based discounts. The customer must make an effort (e.g., proving a competitor's lower price, monitoring for price drops) to receive a lower price.
These price guarantees appeal to the most price-sensitive buyers, who are willing to spend time monitoring the prices of the seller and their competitors.
Like the other tactics, this approach avoids the need for across-the-board price cuts.
Final Thoughts
Effort-based price discounts are a powerful strategic tool for businesses. By implementing hurdles like coupons, rebates, or waiting in line, companies can effectively segment their customers. These tactics allow them to attract price-sensitive buyers and boost their profits without the revenue-eroding effects of across-the-board price cuts.
The next edition of Pricing Pointers will look at some of the potential pitfalls of using effort-based discounts, and how to safeguard against them.