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Segmentation is a crucial aspect of pricing strategy. It involves understanding the needs, values, and willingness to pay of different customer segments. Instead of trying to position one product to multiple segments, companies should focus on productizing and packaging their offerings differently for each segment. This allows for targeted marketing, tailored value messaging, and the ability to act differently towards each segment. By understanding and catering to customer segments, companies can maximize their chances of success and effectively meet the diverse needs of their customers.
Effective segmentation is characterized by the ability to act differently towards each segment. Companies should be able to develop new products, build business cases, come up with unique product marketing messages, and implement sales strategies tailored to each segment. When segmentation is done correctly, there is a clear differentiation in how a company interacts with and serves each segment. Segmentation should not be based solely on demographics or personas, but on the actual needs, values, and willingness to pay of customers. Companies that successfully segment their market are better positioned to effectively reach and engage their target customers.
Early-stage founders should consider segmentation right from the start. While it may not be feasible to launch products for every segment initially, understanding the different segments and their specific needs can guide product development and prioritization. By identifying the segments that align best with the initial product offering, founders can focus their efforts on serving those segments effectively. This allows for tailored value messaging, targeted marketing, and a deeper understanding of customer needs and preferences.
Companies like Apple and Porsche are examples of effective segmentation. Apple offers different iPhone models at various price points, targeting different customer segments. By understanding the diverse needs and willingness to pay of their customers, Apple can effectively cater to multiple segments and maximize profitability. Porsche also demonstrates effective segmentation by developing products like SUVs, tailored to customer preferences for luxury and performance. These companies show that effective segmentation leads to better customer satisfaction, greater market reach, and increased profitability.
Understanding the importance of differentiation and productizing to different customer segments is crucial. By offering products tailored to different needs and price points, companies like Apple, Eventbrite, and Uber have successfully tapped into different customer segments. This strategy allows companies to address diverse customer needs and capture a wider market share.
When pitching a product, it is essential to emphasize the benefits rather than just listing the features. By highlighting the value that customers will get from the product, companies can better connect with their target audience and drive engagement. Companies like Porsche and Shopify are examples of effectively communicating the benefits of their products to attract customers.
Behavioral pricing involves understanding and leveraging the psychological factors that influence customer decision-making. By utilizing tactics like the compromise effect, cognitive framing, and different pricing models, companies can influence customer behavior and increase sales. Examples of companies effectively using behavioral pricing include Starbucks, Michelin, and Shopify.
In challenging market conditions, it is important to approach pricing strategically. Rather than simply discounting prices, companies should consider alternative approaches. These could include offering less expensive alternatives, implementing non-pricing actions like providing more value or adjusting contract terms, and exploring different pricing models to meet customer needs and maintain profitability.
Madhavan Ramanujam is a senior partner at Simon-Kucher, where he works with tier-one tech companies like Uber, Asana, and LinkedIn to help them develop their pricing and monetization strategies. He’s also the author of the most widely read book on pricing strategy, Monetizing Innovation. In today’s podcast, we talk about all the elements that go into your pricing strategy. Madhavan gives real-life examples of having conversations about “willingness to pay,” how segmentation should impact your pricing, and when to start thinking about pricing. He also shares tips on how behavioral pricing impacts your thinking, how to restructure your pricing during a downturn, and much more.
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Find the full transcript here: https://www.lennysnewsletter.com/p/the-art-and-science-of-pricing-madhavan
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Thank you to our wonderful sponsors for making this episode possible:
• Lemon.io—a marketplace of vetted software developers. Get your match within 48h: https://lemon.io/lenny
• Mixpanel—product analytics that everyone can trust, use, and afford: https://mixpanel.com/startups
• Miro—a collaborative visual platform where your best work comes to life: https://miro.com/lenny
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Where to find Madhavan Ramanujam:
• Twitter: https://twitter.com/madhavansf
• LinkedIn: https://www.linkedin.com/in/madhavan-ramanujam-1533063/
• Website: https://www.simon-kucher.com/en-us/leadership
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Where to find Lenny:
• Newsletter: https://www.lennysnewsletter.com
• Twitter: https://twitter.com/lennysan
• LinkedIn: https://www.linkedin.com/in/lennyrachitsky/
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Referenced:
• Monetizing Innovation: https://www.amazon.com/Monetizing-Innovation-Companies-Design-Product/dp/1119240867
• It’s Price Before Product. Period: https://review.firstround.com/its-price-before-product-period
• Rahul Vohra on NFX podcast: https://www.youtube.com/watch?v=JCiMqVC6Dok
• Leaders, Killers, and Fillers framework: https://kevinacohn.medium.com/leaders-fillers-and-killers-creating-bundles-that-work-7f4c7329cf53
• Predictably Irrational: https://www.amazon.com/Predictably-Irrational-Revised-Expanded-Decisions/dp/0061353248
• Preorder Unlocking Growth: https://www.amazon.com/Maximize-Profits-Prices-Products-Services/dp/1119633060
• Confessions of the Pricing Man: https://www.amazon.com/Confessions-Pricing-Man-Affects-Everything/dp/B08TZPRKVY
• Simon-Kucher books: https://www.simon-kucher.com/en-us/resources/books
• Mastering SaaS pricing (Kyle Poyar): https://www.saas-knowledge-base.com/docs/mastering-saas-pricing-from-mvp-to-ipo
• 6 Must-Reads on Pricing a Product: https://review.firstround.com/our-6-must-reads-on-pricing-a-product
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In this episode, we cover:
(03:24) Madhavan’s background
(06:29) How Madhavan got into pricing and monetization
(08:02 ) Why he wrote Monetizing Innovation
(09:43) Why pricing is a cross-functional discipline, but ultimately a function of product
(11:27) What “willingness to pay” is, and why founders need to have conversations about it early and often
(15:23) How Porsche built their SUV around customer feedback and willingness to pay
(18:46) How testing helped a marketplace company avoid building something customers don’t value
(23:50) Several methods to use to learn willingness to pay
(33:38) When and how the willingness-to-pay conversations happen
(37:08) How many customers you should be talking to
(38:13) When to revisit pricing
(39:20) Segmentation strategies
(42:42) Why you need to act differently to your segments that have different needs
(44:33) When to think about segmentation
(47:49) Examples of segmentation done well
(52:24) The importance of dynamic segmentation
(53:19) The three pricing strategies: maximizing, penetrating, and skimming
(55:49) How to use bundling and packaging to unlock segmentation
(59:50) Why how you charge is more important than how much
(1:03:30) Subscription vs. usage
(1:07:40) Pricing options and structures
(1:10:22) How to run tests to see which pricing model works best
(1:12:06) Focusing on benefits vs. features
(1:16:13) What behavioral pricing is and why it’s important
(1:20:54) Tactics for behavioral pricing
(1:26:33) Determining pricing thresholds
(1:28:23) Tips for pricing in a depressed market
(1:32:50) Madhavan’s new book
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Production and marketing by https://penname.co/. For inquiries about sponsoring the podcast, email podcast@lennyrachitsky.com.
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