We see a lot of market segmentations in our work. Often these segmentations are the weakest part of the marketing plan. Many B2B market segmentations are limited to firmographic data and in some cases are simply a list of industry verticals. These segmentations are meant to divide the market into neat little buckets - the primary purpose being finding a market that fits the offer.
Most companies, whether early stage or mature, have undertaken some level of market segmentation. But more of than not, the use case for these segmentations are restricted to high level marketing functions, creating buyer personas or to organize sales efforts. Market segmentation is an incredibly powerful tool that can be used to inform offer differentiation and develop value-based pricing for sustained competitive advantage. Firmographics-only market segmentations do not generally translate into actionable insights. It is hard to use them to create effective pricing and business strategies that result in offer stickiness and healthy unit economics (Customer Lifetime Value and Customer Acquisition Costs).
Most companies reach out to us when they encounter pricing issues with an existing offer or when they are trying to figure out pricing for a new offer. There is a deep connection between pricing and underlying market segmentation. Pricing issues are often symptoms of other more deep-rooted segmentation problems. In a lot of cases, organizations are focused on fixing the symptoms such as poor conversion rates and poor unit economics and not on addressing the root causes of the problem.
The following are a few common pricing problems that we see in our work:
1. A new offer is being brought to market but there is a lot of confusion around how much to price the offer.
Early stage companies more often that not set an arbitrary price using competitor pricing or their own costs as a benchmark. More mature companies set an arbitrary price using the pricing of their existing offers and/or competitor pricing as a benchmark. For mature companies, the downside of getting the pricing wrong for their new offer is higher, as they may end up hurting the brand for their existing offers.
Market segmentation is the foundation to value-based pricing. If the segmentation is wrong at the get-to, it will be hard to get anything else right. Before considering pricing, we should consider:
How the offer creates emotional and economic value for different customer segments
If the value created is differentiated enough relative to the customers’ next best competitive alternative
For a differentiated offer, which customer segment should be targeted based on business objectives
2. An existing offer is well received and the organization has been able to periodically raise prices without pushback - but the organization does not know where the pricing cap is.
There is anxiety around not knowing whether they are leaving money on the table, or if they are close to crossing a threshold that might alienate their customers.
These are symptoms of inadequate market segmentation. Good market segmentation identifies customer segments that derive economic and emotional value the same way and display similar buying behaviour. We cannot monetize what we do not know. Blindly raising prices without truly understanding how much and in what way an offer creates value is just tempting fate.
3. An existing offer is getting pushback and the organization does not know why.
The knee jerk reaction to customer pushback is discounting, which leads to an inevitable race to the bottom.
An organization cannot focus on improvement if they do not know what to fix. They have to start with market segmentation to understand why there is pushback and how to create a differentiated offer relative to their customers’ next best competitive alternative.
Companies come to us to fix a pricing problem, but most “pricing problems” can be traced back to a “segmentation problem.” Before we can “prescribe” a pricing solution, we need to diagnose the root cause of the symptoms, and that starts with value-based market segmentation.
The Ibbaka approach to market segmentation has had a proven track record of success because:
We take a cross-functional approach to value-driven segmentation
We work closely with our clients’ Product, Marketing and Sales teams and take an iterative approach to crafting in-depth exploratory surveys and interviews to capture emotional and economic value creation for an offer. Our focus is to uncover how value is being created for different sets of customers - not just the firmographics, geographies or industry verticals. We let the market tell us if and how value is being created. The end goal is to understand what drives economic and emotional value creation for our clients’ customers and use that knowledge:
to recommend meaningful offer differentiation
craft value messages for target segments
design pricing to a capture a fair share of the value created
Our expertise lies in finding hidden patterns in data
We make a conscious effort to take out confirmation bias in our segmentation research work. Data collected through surveys and interviews is analyzed using our proprietary data analytics software. Our algorithms identify market segments based on underlying patterns of economic and emotional value creation as well as buying behaviour that would otherwise be difficult to find. Our segmentations are rich sources of data that shed a light on how segments meaningfully differ from one another. This enables us to design offers and pricing architectures that result in healthy unit economics.
Good pricing starts with great segmentation. At Ibbaka, we believe in creating a community around sharing pricing best practices. We designed a free online Self-Assessment tool to provoke thinking around your organization’s segmentation and pricing strategies.
We are also conducting ongoing research into the pricing of innovation. Share your thoughts and experience in this survey.
If you have a question about market segmentation or pricing, contact us at firstname.lastname@example.org. We are always happy to have a chat.