It’s Time to Resegment Your Market (and Revise Your Pricing)
The US election is behind us, many of our customers at Ibbaka have worked out their Covid-19 and post Covid-19 strategies, and we’re moving into a new market in 2021.
Given the changes we’ve all experienced in 2020, now is the time to resegment your market. When you do this, you’re looking for two key changes:
- Have current customers and prospects changed segments?
- Has the segmentation itself changed?
Any changes to either of these should cause you to reconsider your pricing strategy.
Related read: The Ultimate SaaS Pricing Resources Guide
Let’s begin with the easier case. We’ve redone segmentations for a number of our B2B SaaS companies, and so far we’ve found the following trends. These results are for the old segmentation model and do not reflect any new segmentation work. The numbers rounded to the nearest 5% are stated as percentages for the sum across the five companies considered.
Note that this is very generalized data as each company’s segmentation model is unique to its offers and strategy. You don’t want a copy-cat segmentation.
This very small sample suggests that at least some companies are seeing increased commoditization under Covid. This is generally a bad thing, as commoditization means lower willingness to pay and less opportunity to make strategic pricing decisions.
If this is true, why might it be the case? There are two possible reasons:
- In a difficult market, companies are going back to basics and looking for the simplest “lowest common denominator” functionality
- Product-market fit has shifted, and the old segmentation frames no longer fit the market
Of course both may be true, compounding the problem—but the only way for you to know is to resegment your market. This should be a top priority as you plan for 2021. You need to know what’s changing.
What is a market segmentation frame, and how do you develop one?
A market segmentation puts your prospects and customers into different buckets so that you can make choices in the product you offer, how you communicate, the pricing model and who you target. Market segmentation is the foundation of good pricing.
Some people segment their markets by what are called firmographics: customer size, industry, geography. For most SaaS businesses, this does not drive any particularly important insights. It does not help you with product market fit and it does not help you to shape willingness to pay.
From a pricing perspective, there are three compelling ways to segment your market. The most important is a value-based segmentation.
With this lens, a good segment is one that gets value in the same way and that buys in the same way. To do this, figure out the economic and emotional value drivers that lead your customers to buy, and then cluster like with like (I generally use the Louvain algorithm to do this).
Once you understand your value segments, look at the buying process. You need to segment by buying process to build an effective revenue generation machine.
A secondary way to segment your market is by looking at market dynamics. Here you are looking at price elasticity of demand (how demand changes with price) and cross-price elasticity (how likely a customer is to change vendors in response to a price differential).
Our surveys are finding that both cross-price elasticity and price elasticity of demand are changing in many industries. You need to check this for your own customers. (I look at this in more detail in my article about understanding your market’s dynamics before you set your pricing strategy).
Pricing experts also like to look at pricing dispersions. If you have a lot of customers, these can be very insightful. Do you have a cluster of clients who consistently pay more than other seemingly similar companies? If so, why? Is there another cluster that seems to be underpriced? Doing this also helps you check to see if your pricing and discounting are disciplined and if your pricing model actually predicts your pricing. For more, read this article on critical metrics for pricing execution.
- Things have changed. How people get value from your offer, how they perceive that value and their willingness to pay may be changing. You need to know what is happening.
- Segmentation lets you target. Focus your product, your revenue generation activities and your pricing on the segments where you can deliver the most differentiated value.
- You are leaving money on the table. If you lack an up-to-date segmentation, you’re probably pricing to some sort of mythical average—and that means you’re underpricing your best customers.
How to resegment
- Know your value drivers. How do you create value? Who do you create it for? How can you communicate this to them?
- Segment by value. You’re looking for groups of customers (and potential customers) who get value in the same way and who buy in the same way.
- Target. Design your offers, your value communication and your pricing for the customers where you can deliver the most differentiated value.
Next year is going to be a very interesting one. There will be lots of growth opportunities for companies that invest in understanding their markets and delivering value to their customers.
Time to get to work.
More SaaS pricing resources
What’s the state of pricing in 2023? Data from our 2023 SaaS Benchmarks report uncovers a few key trends to know heading into the new year. Read the full analysis here.
How can B2B SaaS leaders use pricing to their advantage? Learn more in Paddle’s 2023 State of SaaS Pricing report here.