I sat down with Chad McAllister over at the Product Mastery podcast, and we chatted about the importance of market segmentation and product pricing. We dove deep into everything from:
- Product strategy
- Getting started with market segmentation
- How customer segmentation impacts pricing
The whole episode is available below, or you can read the summary instead. Let’s get to it.
What is product strategy?
Product strategy is not a set of goals, and it’s not a road map. It’s also not the product you have on the market. It’s the art of understanding customer problems and aligning your company around creating solutions for them.
Market segmentation influences your product strategy. Imagine you’re commanding an army and marching through hilly terrain. Which route do you take? What are the dangers? What are the advantages?
Tesla is an excellent example of a company that understands this. In 2006 Elon Musk told the world his mission was to move the world away from reliance on fossil fuels. His first car was the Tesla Roadster which cost $250,000. They came out with the Model S at $80,000 and Model 3 at $35,000.
Elon Musk knew this—the electric motor can deliver power directly to the wheels. This unique capability of electric motors means the electric vehicle is faster than a Porsche or Ferrari off the line, 0-60, every time. So Tesla found a group of people who cared deeply about that. They didn’t care about the limitations of an electric car at the time (i.e., driving range, lack of charging networks). Tesla segmented the market and aligned the company with these customers’ interests and Tesla’s capabilities to win.
“One lesson I learned the hard way was starting at the top. Make sure that leaders know that segmentation is a thing. If the mindset is that our product is for everyone, then you’re not going to succeed. You can’t work with a company that isn’t open to segmentation.”Dan Balcauski
If you’re going to implement market segmentation, you should start early. It makes everyone’s jobs much more straightforward. If you build a product without segmentation in mind and hand it to marketing to, “go position it”? This strategy is doubtful to succeed.
A priori (before) and post hoc (after)
Your customer needs are heterogeneous. And customer segmentation is all about creating groups that are homogenous within a segment but heterogeneous within groups. I tell clients two things that impact the quality of a segmentation. It’s equal parts data and methodology.
- A priori. This means using existing research or segmentation schemes. Think customer geography, company size, or industry vertical. This approach has some value—it groups customers who are similar to each other well. It’s fast and cheap as the data is easily accessible. But it doesn’t answer the why behind customers buying decisions. It’s also an excellent way to start a dialog with a company and show any areas of disagreement and risk–which is great at this stage as it shows what you need to work on.
- Post-hoc. What are the core underlying customer value drivers? Start with the customers’ view of the world. It is pricey. You might need to use expensive statistical tools. We use jobs-to-be-done theory, market research, and customer interviews to generate personas and then run quantitative research to validate that.
- Jobs-to-be-done data. The plethora of options for segmentation exercises often presents a challenge for product managers. A priori segmentation relies on observable data. Post hoc segmentation uses unobservable data, motivations, and analysis.
You have to have data and to know who your competition is. Customer interviews give you incredible insights. Don’t put the cart before the horse—start with interviews and customer segmentation before you build or market the product.
How does market segmentation impact pricing?
Pricing is how a buyer and seller divide the value in a transaction. But perceived and realized value differs between segments. The only value you can price is the differentiation value, and the market sets the rest.
It’s all about packaging—and we don’t mean boxes. Packing is how you take the features you built and put them together in a way that resonates with your audience. You don’t want to overwhelm customers. Having just one choice or ten choices are equally bad decisions. Your goal is to make it easy for customers and easy for your sales representatives. Understanding your customer segmentations first makes this process much more straightforward.
“You’ve got to make hard decisions in the packaging choice. In this pricing process where you distribute value between buyer and seller一if, there’s only one feature you pay 800 dollars a year for, it better be good.“Dan Balcauski
Packaging is partly a sales technique. You want to make the go-to-market motion to be as efficient as possible. You want to reduce drag on marketing, sales, and customers. Your goal is to reduce the time it takes for customers to realize that this product provides value; this product is meant for me.
LinkedIn is one company that packages well. They have a base social network. Then they have a Business Premium option, Recruiter, Job Seeker, and Sales Navigator. They identified the different personas and segments that use particular sets of features.
So when I look at LinkedIn, I don’t have to look at Recruiter or Sales Navigator一I can go straight to Business Premium and buy just what I need.
Too often, leaders think their product is for everyone. This perspective seldom reflects reality and leads to problems flowing down the line with pricing, messaging, and pretty much every other marketing function. If you’re all things for everyone, you’re nothing for no one. And no one is going to go to you. People want specialists to solve their problems, not generalists.
Product pricing and market segmentation are complex topics for anyone in the world of SaaS. So here are a few parting thoughts to make sure you get the most out of this article.
First, make sure you have a rock-solid product strategy. A product strategy guides you through the market and ensures your problem is solving your customers’ problems.
Second, don’t put the cart before the horse. You build a product strategy on solid customer segmentation. A successful approach to segmentation requires first 1) getting the executives to buy into a segmentation approach and 2) conducting in-depth customer research. Only then will you have the relevant data to generate accurate customer personas. Once you’ve done that, package your offerings without overwhelming your customers. Offering too many options is just as bad as providing too few.