Q&A: How to Segment Customers for Pricing

Question:  I think something that would be very beneficial is the process of segmenting customers from a blank framework. I am currently going through this at my company and I read everywhere to segment but there isn’t much information about how to execute this so you can group like customers and then begin with pricing. Nicholas.

Answer:  Hi Nicholas, this is an unbelievably important question.  First, let’s differentiate between market segmentation and pricing segmentation.

Market segmentation is to build products or market messages or distribution channels to target different markets.  Your company should start by understanding what market segments they target.  This is not a pricing issue.  This is a business issue.  Your entire business should be organized around serving the same targeted market segments.

You’re in luck!  Different market segments have different willingness to pay (WTP).  You can price for specific market segments and you’re doing the first part of segmentation.  Congratulations.

Pricing segmentation is best thought of within a market segment.  Let’s say your business has a single target market segment, plumbers.  Some plumbers would pay more than other plumbers.  Now the trick is to figure out which ones and find ways to get them to pay more.

Here’s a simple way to start.  Select a dozen customers.  You want them to be as different as possible.  You may go through your history and choose some who paid you a lot and some who paid you very little.  For each of these customers, make your best estimate on what they would have been willing to pay (WTP) you.  It would be great if you could do some market research, but for now let’s keep this simple.

Now, take your estimates of WTP.  What is different about the ones at the highest levels versus the ones at the lowest levels?  These are the factors you may be using to determine how much you will charge those buyer types in the future.  Back to the plumber example.  Maybe your highest WTP plumbers own their own trucks, or service a wealthier neighborhood, or are part of a marketing conglomerate, or have between 5 and 15 employees, or do new custom home construction, or …  You get the idea.

Hope that helps.  Good luck and let me know how it goes.

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