I am a lifelong fan of the San Francisco Giants. I waited a long time before they finally won a World Series in 2010, and then again in 2012 and 2014. Of course, now that they have won it a few times, I want them to do it more often; and I pay close attention to the roster moves they make. Recently I have been lamenting the salaries they are paying to some players, wishing the players would simply be paid for performance. Then I realized – baseball is just a good example of customer willingness to pay and is not different from other markets. Determining customer value compared to their next best alternative and pricing accordingly is an important part of maximizing profitability.
Customer segmentation is a simple concept – identify groups of customers who tend to have similar levels of price sensitivity and set distinct prices for each group. Unfortunately, many companies either think all their customers are the same, or they don’t have enough information to create segments. In particular, we often see this in retail businesses. Unfortunately, assuming all customers are the same results in missed profit opportunities. With a little creative thinking, it is possible to let customers segment themselves and capture more profit.