Monetization Law Number #2

Differentiate your pricing

Differentiation powers your monetization

Your price sends signals. The goal is to make sure the right customers can hear them. Segmentation offers powerful signalling and ensures profit maximisation. 

This chapter is about how you should use price differentiation segmentation of your customers to increase your monetization. As always we break down the chapter into a rule, the rationale and the rabbit hole.

The Rule provides a quick monetization heuristic i.e. a rule of thumb in operation, a kind of —do this— and you’ll be 80% of the way there.

Rationale explains why the rule works with deeper insights and its use in practice.

Rabbit hole provides more in-depth resources and recommendations for anyone wanting to spend more hours researching each topic.

⓵ Rule 📖

⓶ Rationale 🧠

⓷ Rabbit Hole 🐇

⓵ Rule: Monetization Law #2 📖

Always employ at least one price discrimination approach.

⓶ Rationale: Monetization Law #2 🧠

Price discrimination is the practice of charging different prices for the same product or service. The core economic elements of price discrimination are so rooted in many cultures that we barely notice them, let alone raise any objection.

Progressive tax systems confer a form of price discrimination. Those with higher incomes don’t just pay a larger amount - that which would accrue from a fixed tax % multiplied by a higher salary base, but also a larger fixed tax %.

This is clearly a form of price discrimination - eliciting more based on an ability to pay. As such, price discrimination permeates every part of our lives.

Price Discrimination sounds kinda sleazy, so what are the types I should look out for?

Price discrimination divides into three main categories:

First-degree discrimination, or perfect price discrimination, occurs when a business charges the maximum possible price for each unit…remember paying more than the person sitting next to you on a Delta Airlines flight? That’s first degree right there!

Second-degree price discrimination occurs when a company charges a different price for different quantities consumed, such as bundles or slightly different versions of virtually the same product…for SaaS addicts like me, you know what I’m talking about. The familiar ‘starter’, ‘pro’, ‘expert’ pricing page or ‘small’, ‘medium’, ‘enterprise’ is the SaaS norm. That’s second degree.

Third-degree price discrimination occurs when a company charges a different price to different consumer groups. For instance, movie theatres often divide customers into seniors, adults, and children, each paying a different rate when seeing the same movie. We’ve all experienced this third-degree price discrimination.

⓷ Rabbit Hole: Monetization Law #2 🐇

Price Discrimination In Action:

First-Degree Price Discrimination/Dynamic/Differential

As prices vary among units, the firm aims to capture the maximum price for each unit sold. Imagine Amazon selling each book for a different price based on the customer’s willingness to pay - discovered in the form of the perpetual auction until capacity/stock is utilized. Well, this is precisely the airline model.

The key to success is minimal communication opportunities amongst the various customers.

Second-Degree Price Discrimination/Versioning/Bundling

The Software as a Service (SaaS) market uses this form of discrimination to offer their product. Bundling and unbundling feature sets and creative versioning tactics perfectly encapsulate the monetization potential of this approach. 

Third-Degree Price Discrimination/Segment

Third-degree discrimination is perhaps the based known and accepted model. Clear, demonstrable segmentation drives monetization sweep of all market participants. 

🐇 Additional Research 🐇

This book published by the Saylor Academy and Andy Schmitz is one of the best price discrimination research-backed breakdowns currently available.