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16Customer Segmentation and Pricing Tiers

Like money, price talks. It changes perceptions. Price changes the actual experience of using the service: A high price actually improves the experience. Watch what your price says. Push price higher. Higher prices don't just talk, they tempt.

—Harry Beckwith, The Invisible Touch

One of the most customer‐centric strategies your firm can deploy is to offer an array of choices to your customers. It is very “outer‐directed,” rather than just offering a one‐size‐fits‐all, take‐it‐or‐leave‐it option. Humans prefer options, especially in today's world where they face a plethora of choices regarding who, when, what, and how to patronize a business.

From the iconic American Express Green, Gold, and Platinum charge cards, to Starbucks' tall, grande, and venti options, businesses have nearly always offered choices. Almost always three, sometimes four, rarely more. Why? Because smart pricing is about price segmentation and searching, not just offering one price. There is a range of acceptable prices we are willing to pay, and the smart pricers are constantly searching the boundaries of this range. I would bet where you get your car washed you are being offered at least three options. In fact, there has been an enormous private‐equity play in this space, converting car washes into subscription businesses.

There is strong empirical evidence—from both the rational and behavioral schools of economics—that offering customers different options can ...