Answer: The goals and the techniques.
The goals – In market segmentation, the goal is to find similar customers to “market” to. This typically means develop products for, create marketing messages for, pay to access (e.g. via magazine or web advertising). Market segmentation is about the whole package, finding large segments of people that tend to behave and respond similarly.
Price segmentation comes after market segmentation. Once you’ve decided who your target market is, price segmentation further divides that market to find the customers who are willing to pay more than others. For example, you may be selling BMWs. Your target market may be driving enthusiasts, who are relatively well off. Yet within that target market, some people will buy the high end, and some the lower end. Some people will buy all the options and others not. Price segmentation is about determining who within the market segment is willing to pay (WTP) how much.
Even with more focused market segments there are still differences in WTP. For example, let’s further focus our BMW market to men in their mid life crisis who make over $150K per year. Even within this very narrow market, some men are willing to pay more than others. Price segmentation deconstructs this. How about men who make between $150K and $200K who live in Ohio with a wife and two kids? There are still differences in WTP. You get the idea. No matter how narrow the target market, there are differences in WTP you can use.
The techniques – Market and price segmentation use different tools to determine the segments. Statisticians and marketers use cluster analysis to find their market segments. Companies conduct surveys on the markets perceptions of the product and combine this with demographics, psychographics and other customer characteristics to produce the data. Marketers then use cluster analysis on this data to find customers who are similar to each other (segments) and like our product. Notice in this approach there is no dependent variable.
For price segmentation companies typically use more of a regression approach. They gather historical data on who paid how much and combine it with demographic and transaction data. Note this is similar to market segmentation data with the addition of actual price paid. Statisticians and marketers make price the dependent variable and all of the other information the independent variables in a regression analysis. From this, they can deduce which customers are willing to pay more.
Here is one thought you should take away from this blog. Big data is the future. If you already have enough purchase data with price variation and information about your customers, you are ready to use statistics to help with your price segmentation. If you do not, it’s time to start. Put systems in place that collect information about your customers and the transactions.
However, don’t use a lack of data as an excuse. You can use more qualitative methods for price segmentation. At the same time though start collecting the data. It will prove valuable.
Price segmentation is very profitable when done well. It is absolutely worth your effort.
Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author
Photo by Sensinct
To gain more insights on pricing sign up for the Pricing Perspective for a free monthly summary of Mark’s publications.