How to Improve Customer Segmentation in Pricing
Almost all companies typically put effort into customer segmentation. First, they look at the sales data, maybe some original market research data, and certainly secondary research. Those tasked with customer segmentation speak to customer-facing people in their organization: primarily salespeople and customer support people, and a few executives. From that data, customers are segmented based on high-level information such as demographics, location, income, or similar variables. Some companies include information on how their market interacts with the company like who clicks on newsletters, who comments on social media, what kinds of comments they make, etc.
This is good, but not good enough. What’s missing in this equation is what different customer profiles are willing to pay for a product or service, what product features and benefits affect their willingness to pay, and how marketing/sales messages and channels impact said willingness to pay. For some companies, it may be possible to assess what customers are willing to pay for a product or service by changing prices and seeing what happens to sales volume. But ever-changing prices also lead to customer confusion (assuming you have returning customers), and a confused customer will rarely buy from you.
Consumer Business
In the consumer business, customer segmentation is challenging because a company rarely knows much about how its customers make their buying decisions. After all, consumer businesses rarely interact directly with their customers. Companies can find out via market research in various forms. However, this data is often still aggregated to a high degree, and rarely does it include information that is actionable enough. It is often missing which specifics of a consumer product or service affect what customers are willing to pay. Demographics are too high level to be truly valuable. For example, nothing says that more affluent areas are always willing to pay higher prices for a product or service than less affluent areas. Just because the former may have more access to funds does not mean they are willing to pay more. Think about this in the context of who buys $300+ sneakers. It is not the wealthiest demographic.
Business-to-Business
In business-to-business sales, companies often know more about their customers because such organizations often communicate directly with their customers. But there is a significant issue: when a selling organization talks to customers, the buyer often withholds information that would benefit the seller. Sometimes customers even lie to be in a better negotiation position. And this leads to companies getting a somewhat skewed view of their market. If the view of the market is substantially skewed, then the company might even go out of business. This happens to a lot of startup companies.
Another issue that makes business-to-business segmentation hard is that a committee makes most of the significant sales. It is difficult to know who the actual decision-maker is versus the influencer. Several individuals can say “no” but cannot say “yes”. Often, only one person has the authority to decide but will do so with input from several people. It is a misconception that B2B purchase decisions are based purely on data. Like consumer purchase decisions, they are based on emotions, and once a decision is made, a data-derived rationale is wrapped around the decision. That data-derived rationale will be used to justify the decision to other people in the organization.
The result is that customer segmentation ends up being done on high-level variables such as industry, company size, company location, etc. This is better than no segmentation, but again it’s not good enough.
A Different Approach
What would be a different approach? The scenarios I painted above have several flaws: segments may be irrelevant to what a person actually wants to buy, and segments may indicate what a customer “wants” and not what people “want to buy”. That could be entirely different (I might “want” that Ferrari, but I will not “buy” it…).
Doing customer segmentation based on current customers only leaves out segments that might be more attractive. Thus, non-customers must participate in the dataset used for segmentation. Anecdotal high levels of aggregated data lead to mismatches between the decision behavior of a market and the definition of segments. A more precise segmentation is intended to maximize revenue and market share.
So, how can customer segmentation be done better to be more precise and enable a company to increase its market share at higher prices?
Customer segmentation should be based on understanding how sales volume is affected by different prices. It is not good enough to understand what a market “wants”, but it is essential also to understand what they want to “buy.” It becomes necessary to understand what a market wants to pay for a product or service.
Customer segmentation must include both customers and prospects (i.e. non-customers). It is more important to understand how to segment non-customers and/or expand current customer segments to have them as a potential growth source.
Customer segmentation must include customers’ value perceptions, not only demographic data. It needs to include how different product or service features, functions, and benefits affect sales volume and revenue at different prices.
Customer segmentation must include different marketing messages/marketing channels and how different sales methodologies, messages, and use cases all affect sales volume predictions at different prices.
Customer segmentation needs to include decision behavior. What reference sources do customers and prospects use? What process is used when making a purchase decision? What is the role of influences on purchase decisions, and how does this affect sales volume at different prices?
B2B customer segmentation needs to include the titles and functional roles of the individuals involved in the purchase decision process.
The marketplace research conducted for customer segmentation must be completed anonymously and be cleverly phrased so respondents cannot figure out on whose behalf the research is done. The research must be statistically valid.
Respondents to marketplace research must be qualified, so only those who are true potential or actual buyers are allowed to answer the questions.
In summary, doing customer segmentation “right” is substantially different from what most companies do. It is more involved and, more than anything else must be conducted with the mindset of a marketplace that “wants to buy” as opposed to just “wants”. Developing a detailed understanding of what customers and prospects wish to pay for and how different prices ultimately affect sales volume and revenue is mandatory.
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