What is segmentation? 📊 Podcast Ep. 16
Can we charge different customers different prices? You bet we can! In this episode of Pricing College – Joanna introduces and explores the concept of segmentation.
For the vast majority of businesses – whether selling to consumers or to businesses – you will likely want to tailor your offer and charge varying types of customers different prices.
This could be due to some customers buying much more – or requiring additional services or value adds. Segmentation is vital as a step to understand your customers – and charge the “right” price.
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TIME-STAMPED SHOW NOTES:
[00:45] Many companies are investing in segmentation technology.
[01:10] How can a new start-up segment their offer and charge customers different amounts?
[01:40] Many companies still use demographic and location-based segmentation – and some do not segment at all.
[02:40] When you fail to segment – value based pricing is almost impossible.
[03:30] Psychographic segmentation – Aidan has no idea what it is! So, Joanna explains.
[04:50] If you fail to segment – you will undercharge some and overcharge others. Missing c. 80% of your potential customers.
[06:10] By knowing who your customers really are – you can tailor your services much better.
[07:10] You need to dig deep – to really understand value drivers.
[08:00] Lots of software systems have pre-programmed segmentation – that may not actually suit your business.
Today, we’re going to talk about segmentation. What it is and why it’s important?
The reason we want to talk about that now is that a lot of companies and pricing departments are investing in pricing technology and new systems. Since a lot of these new systems require segmentation, a lot of advances have been made in segmentation. But we’re just going to talk about what it is and some applications.
Just this week, we had an inquiry of a startup business. The inquiry was, we have different types of customers, we have large corporate customers, and we have smaller customers, mom and dad stores.
So, how do we segment our offer to those businesses?
How do we deliver different services?
And fundamentally, how do we charge them differently to maximise the potential revenue to the business?
A lot of companies are struggling with segmentation at the moment. It’s because they’re using fundamentally quite outdated segmentation principles and approaches. And they are largely derived from demographic segmentation. That’s usually things like postcode or location, geography, and country.
They split the country up in large chunks. But the problem with putting a lot of people in large groups is that you don’t get the subtlety in terms of pricing, in terms of understanding their needs, and why they buy.
I would even say a very large number of companies in Australia and globally don’t segment at all. They fundamentally sell, you know, we go back to the apples. And you come in to buy one apple, or you come in to buy 10 apples. You sell it at the same price and under the same circumstances, whether this is online or delivery or through bricks and mortar store.
A lot of companies don’t segment, either offer to their customers. That leads to a lot of problems because they’re not addressing the customer’s needs. Also, they’re not giving their customers what they actually really want. In fact, they’re fundamentally just pricing using cost-plus.
I think we talked about it before. They worked out their cost. Meaning, they just added up the percentage margin on the top and then just rolled it out. No segmentation at all.
Other companies are a little bit more sophisticated and they have been using that geographic segmentation principle. But there are other things that people are doing now, especially with online businesses in fashion.
They’re looking at price segmentations in terms of their customer’s behaviour. They track what customers are buying in real-time. They’re also trying to use more analytics to understand different customer behaviour. This is so they can split people off into different groups which is quite useful.
Then there’s another new type of segmentation that’s called psychographic segmentation. Do you know what that means?
That’s a little bit more about value-based pricing, it’s more aligned to that. It’s when your customers have a specific value principle in mind:
1. They buy because they like to be healthy.
2. They believe in a cleaner ecology and things that are important to them.
3. They’re motivated by people in companies that have a similar value system to them.
4. It can come down right to the food they eat.
I’m thinking now like grilled burgers, we’ve all had a nice grilled burger. Why do people go there? They’re trying to segment their customer base using that psychographic segmentation, where people go there for a healthier burger and Greenburger. They treated their animals right before slaughtering them and customers like that. Specifically, they put a lot into that sort of ecology motive.
We’ve covered a lot of what segmentation is and the factors to look at. Now, a good question is, why would you segment your customer base? What is the reason for it?
This is the discussion we had this week with an internet startup. Fundamentally, the reason is if you treat everybody the same and we’ll give an example of an airline.
Let’s say you’re flying to New York. Some people want to go in coach, while some people want to go in premium economy. Some people want to go to business class.
Now, if you charge or try to charge everybody with the same price for the exact same service, what you’ll fundamentally do is undercharge. You’ll leave a lot of money on the table to certain customers, overcharge another segment of customer base.
Just through pure luck, you will be hitting the thing they’re right to value spot with certain customers. But what you’re doing is you’re underpricing or overpricing and completely misaligned with 80% or so, of what your actual market is.
In doing so, you missed out on a lot of revenue opportunities and a lot of margin opportunities. It’s because there are going to be some customers that buy your products that are willing to pay more. Then there’s going to be other price-sensitive customers that are not willing to pay the price that you’re charging at all. And they will go elsewhere.
I suppose this is why segmentation is important because it’s identifying those different customer groups. So, you’re aware of what they need. And you know what price they’re willing to pay and what they value. Now, this is how you determine your pricing power.
But I think the actual, you know, Joanna went through a lot of what you look at. But there’s no easy answer. It’s not one size fits all. The segmentation strategy really is a completely different business to business, product to product, or service to service.
When you’re looking at a business, you have to think:
1. What does that business provide?
2. What is its value add?
3. Who is the customer base?
4. How can we break it down?
5. How can we use, what was that complex word, psychographic analysis?
All those sorts of things, when you’re trying to sell a luxury car, an airline flight, or even just a fancy hamburger to somebody. You need to know what that person is buying:
1. Is it a corporate account?
2. Is it a private person?
3. Is it for entertainment purposes?
Dig into it. And when you dig into it deeply, you can get great indicators as to why they value something. Then that gets the next step. How do you segment that base?
The internet version, everyone’s used to seeing it. If you buy software as a service, SaaS stuff – you’ve probably seen thousand times the menu page. You have a starter, Professional Enterprise, categorise segmented offers, that standard. But you probably won’t even realise how many times you are being segmented.
I suppose this comes back down to my original point when I open this discussion about people, pricing departments, and companies buying pricing technology.
A lot of this technology comes with its own approach to segmentation. A lot of companies choose technology before thinking through their segmentation and their offer. Then, they buy this software and it’s not quite aligned to their business. They go to market approach or even their value profile.
And often, it can be very difficult for them to then unwind the segmentation that’s already pre-programmed in that system. So, just to note here, be very careful about the technology that you choose. Always think about your pricing framework and your segmentation logic first, before actually buying technology. It’s because it does come with its pre-programmed segmentation.
LINKS MENTIONED IN TODAY’S EPISODE:
Pricing and Revenue Management
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