Pricing is the most significant component of operating any business, and it should be given serious thought and effort to make sure you’re making the most of your profit margins.
A segmented pricing strategy allows you to segment your market by target demographics and price accordingly. You’re still selling the very same product, but the strategy enables you to tap into various target audience segments. You’ll be able to sell more of your products or services across segments that would otherwise be priced out. It will also allow you to maximize profits while simultaneously expanding your customer base.
Know your market.
Once you’ve decided to use a segmented pricing model, it’s time to start getting more specific about your customers so you can begin setting your prices.
The first step of this process is to understand who exactly is buying your product or service, which will help determine how much they are willing to pay for it. This requires some customer research, and it's a good idea to talk directly with your existing customers (if possible) or perform market research on the demographic that makes up the majority of your customer base.
Then you need to get even more detailed with this. The information you have gathered from talking with actual customers should help you reach specific conclusions about the type of people already buying from you. For example, if most of your current customers are college students, they probably don't have as much money as someone in their 40s who has had a successful career for 20 years.
In addition to knowing what kind of person your target audience is (i.e., age range, income level), you also need to know their personality traits and interests. Knowing these things will help inform what sort of price points they will be willing (or not be willing) to pay for your product or service.
Analyze your products and services.
You need to know the ins and outs of exactly what you're selling and how to segment your customers if you want to create a successful pricing strategy. The first step is to identify your products and services and categorize them into groups of goods or services that are most similar in terms of features, price points, customer value, and other related characteristics.
For instance, a restaurant with three lines of flatbreads (Margherita, pesto chicken, and BBQ pork) can group those items together because they share common toppings (cheese, meat), ingredients (flatbread dough), calorie content (10-20 calories per ounce), and customer demographics (millennial professionals) but can offer different price points based on the cost associated with each product. The Margherita costs $1 per slice because it only requires tomato sauce and cheese for toppings; pesto chicken costs $3 per slice because basil is more expensive than tomato sauce; BBQ pork sells for $4 as an entrée because it has more calories than the other two options.
Determine each segment's willingness to pay.
Determine each market segment's willingness to pay.
To determine the optimal price for each market segment, you need to understand how much money each group is willing and able to spend. You can get this information from a few sources:
- Interviews and surveys: Customers are often happy to provide feedback when asked, especially if they feel the company will value their opinions. You can use existing customer data if you have it available. If not, it's time to start asking your prospects and customers questions about their budgets, income levels, and price points (among other things). If you're just starting out with market segmentation, all of these interviews should be face-to-face—you'll want to talk with people in person so that you can ask follow-up questions and gauge body language in response to your inquiries.
- Industry research: Organizations like the Bureau of Labor Statistics or the Census Bureau collect extensive data on consumer spending habits across many industries. Similar reports may be available for your industry that can give you an idea of how much different segments are likely to spend on a particular type of product or service offered by your business. You might also consider looking at competitor pricing for similar offerings; this could help you determine what type of pricing structure would be feasible for your business model based on the expectations set by others in the same industry.
- Price testing/elasticity analysis: The most reliable way is through actual price testing experiments. When changing prices drastically, take care not to alienate loyal customers—you don't want them walking away due to a sudden price hike!
Assess how much each segment buys.
So you understand the differences between your segments, now it’s time to measure them.
First, measure the average number of units sold per segment. This is important because you need to know which products are selling better than others.
Second, measure the average dollar value of sales per segment. Let’s say that one segment buys more than another, but it may still be a smaller part of overall revenue because they purchase less expensive items from your business.
Third, measure the average profit per segment. You will want to account for how profitable each market is for your business so you can focus on those that drive the most income and growth.
Fourth, measure the average profit margin per segment. This metric shows what percentage of each sale goes towards making a profit rather than covering costs like production or advertising expenses. If one group spends more money at your online store, they might also generate larger margins. This means there could be room to increase prices in this market so long as demand stays strong enough that customers do not switch away from buying other brands.
Finally – and perhaps most importantly – measure market share across each segment to see what percentage of spending in each category is going toward yours versus competitors' products/services. Know where your company sits within these markets by noting their positioning strategies and product offerings; doing so helps identify opportunities for growth within these segments based on existing gaps created when competitors fail with theirs (or if there aren't any).
In this post, you learned how to create a segmented pricing strategy for your business. You learned how to identify your target customer and the different segments they belong to, then use that information to create a segmented pricing strategy.
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