Customer segments and their willingness to pay
Most of You will probably agree that the key to maximising profits is an appropriate customer segmentation. However, this is only half the way we have to proceed in order to achieve the desired results. The segmentation alone will not be useful if we do not communicate properly prices to different groups of customers.
Each group of customers will perceive the value of the product in a different way, so the price they are willing to pay for it will also differ. Customers have various needs, they pay attention to different aspects, and our role is to adapt the offer to the expectations of the customers. However, how to do it in order to achieve the expected results? There are two main principles: properly justify the differentiation and properly present and communicate the prices.
Differentiation and tailored communication
Appropriate price communication is very important – the essence of the process is not to let any customer feel that she or he is discriminated against on the basis of the price offered to her or him. Of course, we do not have to justify the use of given prices every time, but the customer should be aware of what the possible differences result from. After all, everyone is aware that students or pensioners pay less for many goods and services (cinema, public transport, etc.) and this is commonly accepted. Regardless of how we segment our customers, there are several important rules to follow in the price communication:
- Publish information about regular prices (highest) and offer various discounts to those who deserve them the most (e.g. large quantities, loyal customers).
- Inform directly about discounts to people who are in the specific customer segment (students, senior citizens, loyalty card holders, mothers with children, etc.).
- Communicate lower prices related to promotional campaigns, sales appropriately.
- Don’t change the rules too often – if customers accept them, it’s not worth interfering with them.
Example: Discount program “Rossnę” in Rossmann drugstores, addressed to pregnant women and young mothers. The programme offers discounts on articles for pregnant women, babies and young children.
In the ideal world for sellers, customers buy the product at the offered price. They would compare the price to how much the product is worth for them, rather than how much another buyer has paid for it (mainly for B2B business). Many companies are therefore trying to disclose limited information about their pricing strategies in order to avoid comparison and to be able to differentiate the prices between various groups of the buyers. The basic assumptions of such a policy are:
- Do not give details behind your prices to the general public, but only to the interested customers.
- Treat your clients individually, strive to present a unique offer to each of them. Treat information about it confidentially.
- Use a sufficiently sophisticated pricing strategy to avoid simple comparisons with your competitors (and bringing the comparison mainly to the price, often omitting other relevant product/offer features).
Movens Advisory is a part of Movens Capital and supports its clients to increase their profits by optimizing the revenue side of their sales management, in particular price management. A typical result of the project is an increase in the profit by 1-3 percentage points depending on the industry. Developed solutions are based on facts and supported by hard figures.
Author: Wojciech Gorzeń, dr Maciej Kraus
Last Updated on October 28, 2020 by Łukasz