Disruption in pricing: The effects of value based segmentation

Pepe PaezPepe Paez is a technologist with a deep enthusiasm for marketing strategy. With more than 10 years in the software development industry, he keeps a strong understanding of technology that goes where he goes and is part of his signature in new projects. Most recently, his interest and expertise revolves around Pricing Strategy and overall Strategic Marketing, where he tries to disrupt thinking by going back to basics.

He likes to spend his time between finding new things, being silly with his family and trying to actually enjoy a yoga class. You can find Pepe on Twitter, LinkedIn or email him directly pepe@obsidian.mx



Innovation, as a topic or theme, has been around long enough to become the hype, go into the grave, come back from the dead, and continue a cycle after another to make it a time-tested concept.

And, while innovation in pricing is somewhat common today, it certainly wasn’t in the past. Examples abound, but one category in particular perfectly exemplifies why innovation and disruption in pricing are important.

Dog food has been around long enough that anyone can familiarize with buying some of it for a pet or seen a friend do the same. And, it is quite easy to get lost in all the different types of food, brands, benefits of one type of food to another, and the prices, or the prices they charge. They can be something hurting for some, but if you pay attention, there is always someone who buys the most expensive food, the most exclusive toys and whatnot for their dog.

It wasn’t always like this. Dog food was much simpler 30 years ago. Back then, dog food was simply offered based on the age and size of the dog (small puppy to big adult). This segmentation was enough to cover any need for any dog owner, their dog was either a puppy or an adult, and it was either small, medium or big. Dog food manufacturers didn’t have a problem with that, their labs had, through the use of science, cracked the nut in terms of nutrition requirements of man’s best friend.

The market segmentation would look something like this:

dog food segmentation

But like in any other industry, innovation reared its head and eventually someone thought, “what if there is something more in terms of value for the dog owners besides nutrition?” And, it wasn’t something hard to figure out. As I said, today there is always someone buying the most expensive food. Back then, it was people who would take their dogs to the vet, then to a spa, to the fine restaurant and then to a cruise.

These were people who saw their pets as something else, companion maybe, surrogate child? What really mattered was an understanding of the characteristics, and look beyond the realm of traditional market segmentation and taste the honey of value based segmentation.

While I would love to dedicate a big portion of this post to that topic, I’ll refrain and focus on the effects of value based segmentation to this example and how that reflects to the power of disruption, especially in pricing.

In this case, what some dog manufacturers started to see was how people would see their pet as part of multiple categories: a pet, an employee, a mascot or companion, a child or even as a grandchild.

This led to a much different segmentation for the industry and how their offerings could be delivered to the different segments.

Such segmentation started to look more like this:

new dog food segmentation

Even though this segmentation is far from complete, it does start to show what market studies found: that certain segments were willing to spend more and pay more than the average household. For example, owners with little children spend less than average, while older householders with children no longer living in the house spend 30 percent more than average. And, this has nothing to do with nutritional requirements, the size or age of the dog.

Now, from a pricing perspective (and recalling the high value concept of value based pricing) it was clearly that similar offerings (with very small degress of variation in some cases) could be marketed for widely ranged price points, for someone who sees their dog as an employee they’ll look for nutrition and nothing else, but someone who sees their dog as a child or a grandchild they look for something else: the best for their child–err dog. And, this lead food manufacturers to broaden their offering and basically alter the way we buy dog food today.

Why is disruption important?

This example is very easy and clear to drive the message. In this case, the disruption in price was driven by a paradigm shift in market segmentation, and more specifically, on how the market is perceived. That is, the variables that are used to measure its composition.

What industry or product would you change today? Is there anything that drives you to think there is opportunity being left on the table if the variables that govern a certain industry were just a bit, well, disrupted?

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