Customer Segmentation: How to Effectively Segment Clients
Most companies do some customer segmentation. They might talk to their salespeople or look at their sales data and identify a market segment that appears to be buying more than another segment. This is good because it means that you can focus your efforts on a category of customers that is more desirable than another. But this alone isn’t enough. What is missing from the equation is what different customer categories are willing to pay. What this means is that your data may lead you to a customer category that is significant in size, but this category may have a low willingness to pay. If you focus on a customer category that has a low willingness to pay, you’ll need to have low prices. Low prices lead to low profitability. Profit drives every company; if you don’t make a profit, your investors will eventually stop supporting your company. If you’re not making any revenue, you also won’t be able to invest in the resources to drive your business to the next level. The next level that everyone, every business owner, and every CEO wants to reach.
What is the Right Way to Go About Customer Segmentation?
The above-mentioned strategy isn’t necessarily wrong, but it isn’t good enough. So, what is the right way to go about customer segmentation? You need to understand how customer segments differ in their willingness to pay. If you don’t know how a segmentation affects willingness to pay, the chances are that you will focus on the wrong segment. This will lead to low profitability and possibly leave money on the table, which you don’t want to do. To measure willingness to pay, you must conduct willingness-to-pay research, which is what my company does. This willingness-to-pay research makes it easy to assess which customer profile is most willing to pay for your product. A customer profile or segment is a group of people with similar reasons for wanting to buy your product and are willing to pay a similar amount. Focusing your marketing and sales on the customer profile with the highest willingness to pay for your product will support higher prices, even if that segment is smaller.
To illustrate this, consider you have a product that costs $100 to manufacture and market with overheads. Perhaps you find a large customer segment where you can sell tens of thousands of your products at $110 each. That’s not a very good business model, but you will stay in business. But if you conduct willingness-to-pay research, you might find another segment willing to pay $150 for the same product. It might be a smaller segment, but your profits will be higher.
What About the Profits?
And what do you do with those profits? Well, you reinvest it in the company, of course. In most cases, you will reinvest it to increase your competitiveness in product development, defining more services, marketing, and salespeople. You can even reinvest it in hiring the best people because now you can afford it. All this means that you can elevate your company to the next level by focusing on a customer segment that supports higher prices over time. This makes a huge difference for investors. Once you’ve taken the time to understand which customer segment is the most desirable and you’ve focused your efforts on that customer segment, your company’s value will skyrocket. It will more than double, triple, or even increase five times just by knowing the willingness to pay of different customer segments and focusing sales and marketing on the segment with the highest willingness to pay.
So, it’s pretty simple. You don’t want to try to sell to a market of millions if you don’t have a product or service that is appropriate for millions, so focusing on the most desirable customer segment is always the right thing to do. But you need to do the willingness-to-pay research to know what the various customer segments are willing to pay; otherwise, it’s just guesswork. Regarding pricing strategy, so many companies are just guessing – setting prices and then using those for customer segmentation will not produce very accurate results.
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