St.

Nicolas College BS IN BUSINESS ADMINISTRATION

of Business and MARKETING MANAGEMENT
Technology PRICING STRATEGY

LESSON 8 Place and time as a Price-Segmentation Fence

The place where a product is used or purchased is another type of purchase-situation characteristic that can serve as an
effective price-segmentation fence. Price segmentation based on geography can also make sense when it is the place of
the product’s purchase that serves as the price-segmentation fence. Different purchase locations may involve
differences in the product’s value to the customer (VTC), the product’s costs, and/or the customer’s price sensitivity. For
example, consumers might value a newspaper sold at a commuter railroad station more highly than the same
newspaper sold at a shopping mall or a drugstore. Selling at some locations may involve higher costs than others, for
example, because of taxes, fees, or the expenses of distribution. Customer price sensitivity for a purchase location might
vary because of differences in competitive intensity. There may be many competitors selling the product at some
locations but few at other locations.

SHIPPING COSTS FOR INDUSTRIAL PRODUCTS

For many industrial products, the costs of shipping them from the manufacturer’s plant to the location where they will
be used by the purchasing firm is a substantial portion of what the buyer must pay to acquire the products. Steel,
gasoline, automobiles, wheat, sugar, coal, lumber, and cement are examples of such products.

Some sellers will set prices that cover only the product. The buyer is responsible for arranging to ship the product from
the seller’s plant to the buyer’s location and the buyer pays for this shipping. This practice known as FOB-origin pricing,
a traditional term indicating that the product is “free on board”—that is, free of the seller’s responsibility—where it is
produced. The product becomes the buyer’s property—and the buyer’s concern—when the seller loads it onto the
buyer’s carrier.

Delivered Pricing

Despite the simplicity of FOB-origin pricing, it is more common for sellers of industrial products to use some form of
delivered pricing. In delivered pricing, the price that the seller quotes to the customer includes the transportation of the
product to the customer’s location. Delivered pricing gives the seller a greater degree of pricing control. As we will see,
the bundling of a product’s shipping along with the product can provide the product’s producer with an additional
means of managing the price that the customer pays for the product.

Typically, delivered pricing involves using location of product use as a price-segmentation fence. Those customers whose
use of the product requires it to be shipped to a location farther from the producer will be charged more for the product
than those customers who use the product at a location closer to the producer. The seller’s higher costs—in this case,
higher shipping costs—would make the product’s best price higher for these more distant customers. In basing-point
pricing the freight charges quoted to the buyer are the costs of shipping the product from a place other than the
producer’s location.

Because the markets for industrial products often involve a relatively small number of large customers, it is usually
practical for sellers to specify FOB-destination prices or freight charges individually for each customer. However, for
sellers who want to use publicly posted prices, it is possible to use industrial price zones. These are contiguous areas
within which all FOB-destination prices or freight charges would be equal.
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Absorption of Shipping Costs

The use of delivered pricing helps make it possible for a seller to address a common problem resulting from high
shipping costs. Shipping costs can make it difficult for a seller to successfully compete at the more distant customer
locations.

To deal with this problem, a company may set delivered prices that do not fully cover the costs of shipping the product.
In other words, the seller absorbs part of the freight shipping costs. When delivered prices are set so as to absorb at
least some of the shipping costs, it is referred to as freight absorption pricing. That way, companies become able to sell
the delivered product at a price closer to what would be the best price for the customers in the more distant markets.

Note that when delivered prices involve partial seller absorption of shipping costs, there are two price- segmentation
fences in use. The place-of-use fence allows the delivered product to be sold at a higher price to the more distant
purchasers. But it is the pricing of the product in a bundle that includes both the product and its transportation to the
buyer that allows the seller to be competitive at the farther locations. Because of this bundling, the more distant buyer
in effect pays a lower price for the product itself than does the buyer whose location is closer to that of the seller.

Some companies accomplish this price segmentation between different geographic areas by the bundling fence alone.
They will include shipping in the product’s price and charge the same price—a uniform delivered price—to all
customers, regardless of location. This is sometimes called “postage-stamp pricing” because it has long been used by the
Postal Service. Uniform delivered prices are common in consumer products sold by mail order and online. However, for
sellers of industrial products, use of uniform delivered pricing is more questionable. If the uniform prices involve the
seller absorbing all shipping costs, then it could be prohibitively expensive. If, alternatively, the uniform prices are
accomplished by shifting some of the shipping costs from farther customers to closer customers rather than by
absorbing them, then it may make local customers vulnerable to competition by local sellers who use FOB-origin pricing.

RETAIL PRICE ZONES

Geographic price segmentation in retailing is called zone pricing (also called variable pricing or local pricing). The
management of a chain of retail outlets will classify the chain’s outlets into zones based on their location. The prices
charged by any particular outlet in the chain will depend on its zone. The zones may accomplish price segmentation
between different types of locations (such as shopping centers, office buildings, or college campuses), between different
towns or neighborhoods, or between different national regions.

The use of zone pricing is widespread in retailing. It is used in gasoline retailing, fast-food outlets, clothing stores,
grocery retailing, drugstores, discount stores, and in many other types of retailing.

The prices of all the items sold by a retailer can vary between zones, or zone-specific prices can be used for only a few of
the items carried by a retailer. In some retail categories, the size of the price differences between zones can be large,
sometimes in the range of 40 percent. In other retail categories, the differences between price zones tend to be small. In
supermarkets, for example, the price differences between zones are usually less than 10 percent.
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Convenience-Based Price Zones

In some types of retailing, the use of zone pricing is based on differences between retail outlets in the convenience they
provide to customers. The goal here would be to capture the value created by locating an outlet in places that are easily
accessible to customers as they pursue activities that bring up the need for the outlet’s products.

Higher prices for products sold at convenient locations are appropriate not only because the convenience gives the
products a higher VTC but also because selling at convenient locations is likely to involve higher costs.

Designing appropriate convenience-based price zones for a product depends on gaining an understanding of the places
where customers are likely to be when they have needs for the product. This involves knowing where potential
customers live and work and knowing the locations of their shopping centers, churches, hospitals, and entertainment
activities. Attention to detail here could be important.

Note that convenience-based price zones are not contiguous areas but rather categories of locations that offer
comparable levels of customer convenience.

Price Zones Based on Other Factors

Retail price zones are often defined by factors that are important in determining customer price sensitivity. One key
factor in determining price sensitivity is the customer’s income level. Customers in affluent neighborhoods are often less
price-sensitive than customers in more middle-income neighborhoods.

Retailers such as supermarkets, drugstore chains, and hardware stores will often achieve a comparable level of
convenience to all customers by establishing neighborhood locations.

However, they will often have higher prices in high- income neighborhoods simply because the low customer price
sensitivity makes such prices profitable. Doctors, dentists, lawyers, and other providers of professional services also
often establish convenient neighborhood offices and also often use income-based zone pricing in setting their fees.

A second important price-sensitivity factor that is used in defining retail price zones is the intensity of the competition.
Prices are likely to be lower in those outlets of a chain that are close to low-price competitors. Note that high prices due
to artificial restrictions on competition, such as occurs with the concession operations of sports stadiums or movie
theaters, are over and above the higher prices warranted by convenience alone.

A third price-sensitivity factor is the consumer’s ability to engage in price information search in order to take advantage
of the price competition that does exist.

Research has demonstrated that responding to locational differences in customer price sensitivity can substantially
increase a retailer’s profits. Given the availability of scanner data on sales and prices in many retailing operations, it is
often practical to base these zones on empirical measurement of customer price sensitivity. Further, if an outlet’s
customer price sensitivity is tracked separately for different products, then a retailer can set a zone’s prices higher for
some products but lower for others.
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Constraints on Zone Pricing

There are several difficulties that may need to be dealt with in order for zone pricing to be used successfully. One
important constraint concerns consumers’ judgments of fairness. When consumers observe that the prices in a store are
higher than the prices in another store of the same chain just a few miles away, they are likely to feel that they are being
treated unfairly. A trade association executive noted that such price differences make the manager of the higher-price
store “look like a thief. ”Fear of negative consumer reactions leads many retailers to be reluctant to talk about their use
of zone pricing. When they do talk about it, they often try to give the impression that the price differences are mostly
due to differences in the costs of doing business at various locations.

Consumer judgments of fairness are likely to be related also to broader factors such as judgments about the retailer’s
motives. These are important to consider in decisions about zone pricing.

In addition to the issue of fairness, there are three other possible constraints that may need to be addressed in a
retailer’s consideration of zone pricing:

1. Difficulty of managing price zones. The use of price zones greatly increases the complexity of pricing databases and
other systems needed to manage prices across a retail chain. Managing price zones can be particularly costly in product
categories such as clothing, where prices are marked on each item. In gasoline retailing, prices often change quickly and
there needs to be constant attention to the boundaries of zones and the sizes of the price differentials between them.
There is an increasing use of computer software to help in the managing of price zones, but this use has been criticized.
Errors in zone-pricing decisions could cause the failure of retail outlets, which could then be hard to re-establish. If the
optimum price differences between zones are not large, then the added costs of managing them may not be worth it.

2. Conflicts with advertised prices. Zone pricing may be difficult to accomplish when retail prices are widely advertised.
Large metropolitan newspapers have accommodated the retailers using zone pricing by printing separate editions for
different areas of the newspaper’s readership and by putting price advertising in separate sheets known as free-standing
inserts. These inserts can be easily varied between the newspaper’s delivery locations. Retailers can also avoid the
difficulties created by price advertising by simply refraining from using zone pricing on the particular items that are being
advertised.

3. Conflicts with Internet pricing. Displaying prices on Internet sites also presents a problem for zone pricing. This not
only increases consumer awareness of zone pricing but also undermines it unless the online price is as high as that in any
of the zones. Retailers, such as Staples and AutoZone, deal with this problem by requiring a website visitor to enter his
or her zip code before any pricing information is displayed. This then allows the retailer to give online prices that agree
with the prices that the consumer will find in nearby stores.

PRICING IN INTERNATIONAL COMMERCE

When a product is sold in more than one country, it is commonly sold at prices that differ between the countries.
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Technology PRICING STRATEGY

Factors Supporting International Price Segmentation

A product may have a different best price in different countries because of any or all of the three factors that determine
best price: (1) VTC, (2) costs, and (3) price sensitivity.

There are innumerable aspects of the cultures, lifestyles, attitudes, and tastes of the consumers in a country that could
lead those consumers to value a product more or less than those in other countries.

There are also a number of reasons for differing costs of providing the same product to customers in different countries.

 One reason is that distribution costs may differ between countries. This may occur either because of differences
in the efficiency of the physical movement of goods or because of the necessity of hiring extra middlemen such
as importing agents.

 A second reason for differing costs is that there may be differences in the taxes to carry out operations in a
country or in the costs of complying with governmental regulations.

 A third reason for differing costs is that the risks of doing business in the country may differ.

Consumers in different countries may also differ in price sensitivity. Economic factors play a major role in these price-
sensitivity differences. Consumers buying power—a combination of their income and wealth— differs greatly between
countries.

Even among countries with a generally high standard of living, differences in how the currency in the producing country
translates into the currency of the buying country could have enough of an effect on the expensiveness of a product to
affect its price sensitivity. This is particularly important when competitive factors are also involved.

Gray Market Importing

There are several factors that constrain a seller’s use of country of purchase as a price-segmentation fence. The first is
the possibility of gray market commerce. This is the practice of selling products through unauthorized international
distribution channels.

The term black market refers to commerce that is illegal. Gray market commerce is not illegal in most countries but is
unauthorized and ethically questionable. It violates the manufacturer’s intentions and often violates contracts with a
country’s authorized distributors. Thus, it is commerce that, while not “black,” is in a gray area. Gray market importing,
also called “parallel importing,” is responsible for billions of dollars of annual sales worldwide and is expected to
increase.

Managing the Gray Imports Problem

There are two general approaches to dealing with the problem of gray market imports. The first approach is to take
steps to make gray importing more difficult. The seller can modify the product and it’s packaging, selling in each country
a version designed to appeal more specifically to the customers of that country.
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The producer can sell the product under a different model name or even a different brand name in each country and can
vary the language used on the packaging and in the product instructions. The seller can also develop after-sale support-
service aspects of the product, such as warranties, technical support, and periodic updates, and promote to consumers
that these are available only to purchases made at authorized retail outlets.

The second approach to reducing the problem of gray market imports is to decrease the size of the price differential
between countries. Because it is this price differential that makes gray importing profitable, reducing its size can be
expected to decrease the amount of gray imports into the countries with the higher product prices.

Other Constraints on International Price Segmentation

Gray importing is a marketplace-related constraint on a seller’s ability to use country of purchase as a price-
segmentation fence. In addition to the marketplace, the actions of governments often limit the ability of an international
marketer to sell a product at the price that is best considering the product’s VTC, costs, and customer price sensitivity in
each country. One type of government action consists of price controls, the government mandating of maximum prices.
Price controls could cover all products, such as those imposed by the Brazilian government during its period of excessive
inflation, or could be more selective, covering only certain products. It is usually the case that price controls apply
equally to local and foreign companies.

A country’s government may also impose protective tariffs. These are schedules of import taxes, known as duties that
are designed to protect the local sellers of a product against low-priced competition from foreign producers. Protective
tariff duties have declined considerably due to wide international acceptance of the General Agreement on Tariffs and
Trade (GATT) and its successor, the World Trade Organization (WTO).

However, in recent years, there has also been a rise in actions to counter what has been termed dumping. Dumping is
judged to occur when an imported product is sold at a price that harms local competitors and is lower than the imported
product’s price in the producing country. The typical antidumping action is for the importing country to impose a duty
on the dumped product that raises its price enough to make it comparable to its price in its home country and closer to
the prices of local competitors.

The rise in antidumping actions highlights the strength of the political forces that can drive a country’s government to
impose protective duties. An international seller, who lowers a product’s price to counter the effect of a protective duty,
thereby absorbing some or all of it, might simply be inviting the government to increase the duty. A company selling a
product in more than one country would be wise to consider political factors in developing the pricing strategy used for
each country.

Pricing to Base-of-the-Pyramid Consumers

One of the challenges of pricing in international commerce is the issue of how to set prices low enough to appeal to the
large number of people in developing nations who have very little buying power. The huge size of this market segment
has led it to be referred to as “the base of the pyramid.”
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Technology PRICING STRATEGY

Time as a Price-Segmentation Fence

The time at which a product is used or purchased is a type of purchase-situation characteristic that can serve as an
effective fence to accomplish price segmentation. For example, sellers of service products often vary prices by time of
day, day of week, and season of year. However, the importance of price differences over time goes beyond the
marketing of services. The prices of most products can vary over time, and understanding how the time of a customer’s
use or purchase of a product can be an effective price-segmentation fence is an important part of managing price
structure.

TIME OF PRODUCT USE AS A PRICE-SEGMENTATION FENCE

One of the distinguishing characteristics of service products is their perishability. Services that are unsold at one time
cannot be stored for sale at another time; they are perishable products. This presents a particular problem in dealing
with strong fluctuations in demand.

Peak-Load Pricing

When the demand fluctuations occur during predictable periods, sellers of services often develop a price structure such
that their prices are higher during the time periods of peak demand. This is known as peak-load pricing because the
practice originated with the price-setting policies of electric utility companies. These companies would set higher
electricity prices during the periods when there were heavy loads on their electrical generating capacity and lower prices
at other times. Peak-load pricing has since spread to a wide range of organizations that offer service products.

Peak-load pricing can involve any units of time. The price differences could be between times of the day, days of the
week, seasons of the year, or by the timing of special events. Further, the time-of-use price differentials could be
complex, taking into account multiple units of time.

Peak-Load Pricing as Price Segmentation One reason for the popularity of peak-load pricing is that it is an effective
means of accomplishing price segmentation between groups of customers who are likely to differ in each of the three
factors that determine a product’s best price: (1) value to the customer (VTC), (2) costs, and (3) price sensitivity. If we
consider customers in the off-peak segment of the market, each of these three factors could contribute to a product’s
best price being lower than that for peak-period customers. Off-peak customers are likely to value the product less than
do peak-period customers.

Relevant Costs in Peak-Load Pricing

The differences in costs between peak and off-peak periods could benefit from some further explanation. It was
previously mentioned that there are low variable costs for filling empty bus seats. However, we should keep in mind that
the relevant costs for a price change include not just variable costs but also fixed costs that are incremental—that is,
those fixed costs that will be incurred because of the new sales created by a price decrease or saved because of the sales
lost by a price increase.

Typically, service providers operate at the limits of their capacity during their peak periods. As a result of this, capacity
costs, the costs of maintaining or adding capacity, are relevant for pricing decisions during peak demand periods. This
means that evaluation of possible price decreases during times of peak demand must include consideration of the
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incremental fixed costs of adding capacity. This leads to high breakeven sales increases for such prospective price
decreases, and a lower likelihood of the price decrease being profitable. Thus, peak-period prices will tend to stay high.

On the other hand, off-peak prices are driven only by operating costs, which will usually be only the variable costs for
providing the service. The equipment or facilities acquired for serving peak-period demand will be underutilized when
demand is low and thus their costs are not relevant to the pricing of services provided during those off-peak periods.
This means that consideration of price decreases during off-peak periods should not take into account any of the fixed
costs that are incurred to support peak-period demand. This leads to relatively low breakeven sales increases for such
prospective price decreases and a higher likelihood of the price decrease being profitable. As a result, prices during off-
peak periods will tend to be low.

This emphasis on the costs that are actually incremental to a sale has implications for how costs should be allocated in
service industries. The costs of maintaining the organization’s capacity are incurred for the purposes of peak-period
demand and should thus be entirely allocated to peak-period sales. Off-peak sales do not affect whether or not these
capacity costs would be incurred and thus need bear no share of these costs. Such a cost-allocation concept suggests
that new capacity should be built only when it is estimated that profits from peak-period sales can cover the new
expenses. This makes sense, because to subsidize new-capacity expenditures with off-peak profits is to risk being
underpriced at off-peak times by a competitor who does not have peak-period capacity to support. Having
uncompetitive prices during the off-peak times that are intended to subsidize the peak times could then cause the whole
operation to become unprofitable.

It should be noted that the practice of peak-load pricing is capable of causing a peak reversal. This occurs when a lower
price in the off-peak period stimulates so much demand that the off-peak times become the peak times. For example, an
electric utility’s night rates could be so low that it becomes profitable for large industrial customers to move to nighttime
operations, thus causing the level of nighttime demand to rival that of the daytime peaks. When this happens, capacity
costs begin to become relevant to pricing in the off-peak period. For the electric utility, any further nighttime price
decreases would need to consider the incremental fixed cost of adding capacity. Because these incremental fixed costs
will increase the breakeven sales level for a price decrease, it makes further decreases in off-peak prices more difficult to
justify. It is likely then that the off-peak prices that keep sales during those periods just below the amount necessary for
adding new capacity are the best prices for those off-peak periods.

TIME OF PRODUCT PURCHASE AS A PRICE-SEGMENTATION FENCE

The techniques for using time of purchase (rather than time of use) as a price-segmentation fence are usually framed as
discounts, or lower prices, that the customer can receive by purchasing the product at certain times.

 These discount-purchase times can be grouped into four categories:

 Those that occur periodically
 Those that occur irregularly
 Those that involve making the purchase earlier than other customers
 Those that involve making the purchase later than other customers
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of Business and MARKETING MANAGEMENT
Technology PRICING STRATEGY

Periodic Discounts

One common means by which time of purchase is used as a price-segmentation fence is by offering items at recurring
discounts that are more or less predictable over time. This practice is often known as high/low pricing because there is
an alternation of high-price periods with low-price periods. During the high-price periods, the item is sold at what is
framed as its “regular” price. During the low-price periods, the item is sold at a discount from the regular price, which is
often referred as a “sale” price. This pricing practice is used often in specialty stores, department stores, and
supermarkets.

Promotional Discounts

Sellers often set lower prices for brief, irregularly occurring time periods in order to communicate to customers and
potential customers’ information about the existence of products and the benefits of these products. Because marketing
communication is known as “promotion,” these temporary low prices are termed promotional discounts. When
promotional discounts are simple price decreases, they are often referred to as “sales.” Cents-off coupons and rebate
offers are slightly more complicated forms of promotional discounts.

Promotional discounts to product resellers, such as wholesalers and retailers (i.e., “the trade”), are examples of what are
known as trade promotions. Promotional discounts are very widely used, particularly for consumer products. For
example, in an average year, over 300 billion cents-off coupons are distributed to consumers in the United States. That is
over 1,000 coupons for every man, woman, and child in America.

How a Discount Can Communicate

To fully understand promotional discounts, it is important to appreciate how a discount can communicate information.
The diagram in Figure 11.6 is an illustration of a model of the communication process. A source, in this case the seller,
desires to communicate an intended message to the receiver, in this case the customer or potential customer. A
temporary low price can provide a means for this communication by leading the receiver to take a target action that will
have the effect of getting across the intended message. A common target action is the purchase of the product.
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The target action of a promotional discount need not be product trial (i.e., a buyer’s first purchase of a product). The
target action could also be the consumer’s purchase of more units of a product than usual. This action is often referred
to as “pantry loading.”

Targeting the Poorly Informed Segment

Promotional discounts are usually thought of as incentives, or rewards, for behaviors that the seller wants to encourage.
It does not contradict this viewpoint to recognize that promotional discounts are also a form of price segmentation. In
general, the market for a product consists of a segment of consumers who are well informed of the product’s existence
and its benefits and a segment that is poorly informed. Because the members of the poorly informed segment do not
fully appreciate the product’s VTC, the product’s best price for them is likely to be substantially lower than the best price
for the members of the segment that is well informed about the product. Promotional discounts are a means of using
time of purchase as a fence to charge a lower price to the less informed market segment.

Clearly this fence is an imperfect one—nothing stops a well-informed consumer from buying the product on sale.
However, it is likely that the well-informed consumer has already purchased the product (perhaps picking it up right
after he learned about it) and wasn’t planning to purchase again until the original purchase wore out or was used up. If
the occurrence of a promotional discount is unpredictable and of short duration, it is unlikely to be offered at just the
right time for the well-informed consumer to buy. By contrast, it could be expected that almost none of the poorly
informed consumers will have already purchased the product and would thus all be in a position to respond to the
suddenly occurring incentive of an attractive price.

By this logic, a discount must be unpredictable and of short duration to be an efficient means of communicating about a
product. The longer or more repeatedly a promotional discount is offered, the weaker is its ability to serve as a fence
that keeps the well-informed consumers away from the low price. When unwise managers overuse promotional
discounts, the price reductions could become a different type of discount, such as a periodic discount, which may not be
appropriate for the product in question. Even worse, an overused promotional discount could lower the consumer’s
internal reference price for the product, and, in effect, become a permanent price decrease.

Note that many promotional discounts are not only limited in their timing but also require the consumer to present
some type of “token,” such as a cents-off coupon or rebate form. Such discount tokens can help limit the discount to the
poorly informed segment.

However, even such precise targeting has to be time-limited, because the use of checkout coupons can soon lead poorly
informed consumers to become members of the well-informed segment. The necessity to present a token to get a
discount also tends to increase the feeling of personal responsibility for the discount and thus increase the perceived
value of the discount. Ideally, the amount of consumer effort required for presenting such discount tokens should be
relatively small or else their use may make it too difficult for consumers to try the promoted product and thereby
receive the intended message.
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Trade Promotions

When manufacturers offer promotional discounts as trade promotions, there are at least two possible price
segmentation rationales. One is that the discount will be passed along to the consumer to create a consumer
promotional discount. Such consumer pass-through would occur, for example, when a product’s temporary low price to
a retailer would lead the retailer to put the product on sale. The other rationale is that the temporary discount leads a
reseller to buy more of a product and thus discover that it is possible to quickly move such a larger product inventory.
This would be a reseller form of pantry loading.

For each of these two rationales, there are challenges for the manufacturer. If consumer pass-through is expected, then
there needs to be some means to determine that it actually occurs. If the communication value of pantry loading is the
goal, then the promotional discount needs to be structured so that the reseller cannot use the discount to simply stock
up on the product without taking any steps to learn whether this larger inventory could be quickly sold. Manufacturers
sometimes address this problem by adding conditions to the trade promotion discount, such as a requirement to
grocery retailers that they put the product on an end-aisle display.

EARLY-PURCHASE DISCOUNTS

In many markets, there are some customers who are more willing than others to make an early commitment to
purchase a product. When these customers who are willing to purchase early value the product less or are more price-
sensitive than other customers, then it is possible to use the requirement of early purchase as a price segmentation
fence.

Advance-Purchase Discounts for Service Products

A discount for early purchase, also known as an advance-purchase discount, is often used in the pricing of service
products. For example, in the hotel industry, customers traveling for leisure activities (such as a vacation or visiting
friends) are more price-sensitive than customers traveling for business activities. As it turns out, leisure travelers are also
more willing than business travelers to make an early purchase commitment.

Thus, to accomplish charging different room prices to these two market segments, a hotel can offer a lower price—a
discount—to customers who are willing to book a room several weeks in advance of the date that the room will be
provided. Those customers who are unwilling to make such an advance purchase must pay full price for the room.

Clearly, for days when a hotel can fill all of its rooms with business customers, there is no need to appeal to the more
price-sensitive leisure customers. However, for those days when the hotel will not be entirely filled with business
customers, it could be very important to fill those rooms with leisure customers. Empty rooms produce no revenue.

These points to the key challenge in early-purchase discounting: to offer only enough discounts to fill the capacity that
will not be used by full-price purchasers. For the hotel, the goal is to offer advance-purchase discounts on only those
rooms that will not be booked by full-price business customers.

LATE-PURCHASE DISCOUNTS
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Just as early purchase can be used as a price-segmentation fence, so can purchasing a product later than other
customers. For example, airlines have long offered deep discounts, known as standby fares, to travelers who can delay
their purchase of a ticket until just before the flight takes off. To more effectively keep full-price passengers from
receiving these discounts, airlines typically strengthen the time-of-purchase fence by restricting these fares to certain
types of customers.

Retail Markdowns

Retailers commonly use a late-purchase price-segmentation fence by offering markdowns. Markdowns are decreases in
the price of a retail item that occur after the item has been carried by the store for a certain period of time. Markdowns
are sometimes known as “clearance prices” because they are used to stimulate sales of items that are slow-moving,
obsolete, shopworn, or at the end of their season. Some retailers who specialize in selling merchandise that is at the end
of its purchase cycle will even have an “automatic markdown” policy.