The Power of Market Segmentation in Pricing
People are afraid to focus. They’re afraid to go after specific market segments, and instead want to go after ‘everybody’; they don’t want to miss out on business from a segment they aren’t targeting. Here’s the problem: when you go after everybody, you are ideal for nobody.
When I coach people about pricing, the single most important exercise we go through is understanding how their buyers perceive value. This is true for big companies and for solopreneurs. It’s true for products, services, and subscriptions. Once they understand how their buyers value their product, they gain great insight into their buyer’s willingness to pay.
However, different buyers value any given offer differently. There isn’t a one-size-fits-all buyer’s value journey or value table.
Here’s where market segmentation comes in.
Market Segmentation Identifies Common Buyer Problems
Pragmatic Institute defines a market segment as “companies or individuals with a common set of problems“. This is a very effective definition for many reasons. People with similar problems may be able to use the same solution (product). People with similar problems may respond to the same marketing messages.
Most importantly, people with the same problems may value the product in similar ways. Notice this doesn’t say the same amount (meaning that all the people in a segment have the same willingness to pay). It says they value similar solutions because they are solving similar problems.
LinkedIn is a great example of segmentation of users by similar problem-based solutions
LinkedIn has identified 4 market segments:
- Job seekers
The last category is their catch-all and it’s probably where you and I fit.
Pick any two of the other three and answer these questions:
- What problems does a typical person like that have?
- What solutions would they value?
- What features would they want to see?
- What marketing messages would they respond to?
You can easily see that people in one segment would think differently than people in another segment.
Segmentation Paves the Way to Value Based Pricing
If you want to implement value based pricing, you need to understand how your buyers value your product, which is infinitely easier to do when you have defined market segments.
A Counter Example Against Segmentation
Apple iPhones provide the counter example I sometimes hear.
Apple doesn’t segment their market for iPhones. They sell to old people, young people, different geographies, different industries, and so on. They sell the same thing to everyone. Although this isn’t completely true, it’s close enough to true that we can accept it for now.
Apple is able to rely on their brand and customer loyalty for such massive reach. In their case, it would probably be detrimental to segment their market based on people who want to make calls vs people who want to text vs people who want to play games. Apple can release a new product and sell millions of it without effective marketing. People line up to buy because they trust Apple.
Determining if your Market would benefit from Segmentation
Do people line up to buy your products because of your brand?
Or, do you have to find buyers, get their attention, gain their interest, and convince them to buy?
If you’re in the latter case, then market segmentation will make you much more effective; it’s not possible to win everyone with one product and one marketing message.
Most companies need to better understand their buyers and what they value. This is almost always best done by segmenting their market.
Determining if a Company is already Segmenting Their Market
Here’s a quick test I use with companies I talk to.
I go to their website and look at what they talk about. If they are talking about problems and expected results, then they’re thinking about their market segments; they are well along the path toward value based pricing. If they are only talking about their products and features, it tells me they probably haven’t segmented their market, and we need to start at the beginning.
What does your website talk about?
My advice: define and focus on market segments. Your products, marketing, and pricing will be much more effective and profitable.
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Mark is a pricing expert who helps companies understand value, how to create it, communicate it and capture it. He has a PhD from U.C. Berkeley and an MBA from Santa Clara University, plus 25+ years pricing experience. As an educator, speaker and coach, Mark applies innovative, value-based pricing strategies to guide growth and increase profits for large and small companies.