Author Topic: Never too early to start thinking about segmenting your market!  (Read 554 times)

maizeman

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...hopefully the following story hasn't been reduced to complete gibberish after taking out all references to what the company actually does...

A start up I'm involved with created a new product/service line. Initially we didn't know exactly how much it would cost us to provide, but we had a few big customers who really really wanted it, so we offered to sell it to them for $200/unit, and they accepted. Then once we'd gained some experience, we realized we could charge $50/unit, still make a good profit and get a much larger number of customers. But didn't want to undercut our ongoing contracts so, while we offered it at $50/unit to other customers who inquired, we couldn't list prices anywhere on our website or advertising. Now, after a lot of investments in process optimization, we've got it to the point where we make 80+% profit per unit even at the lower price, and have a lot more capacity than our existing customer base needs. So we're looking into creating a 3rd tier at an even lower price to make some extra money with all that surplus capacity.

What I've learned from this experience is that I wish we'd done a better job of planning for a "good, better, best" branding strategy with different versions of our product targeted at the high end, mid-tier, and extremely price sensitive parts of the market from the start. Trying to put one in place retroactively is a lot more awkward, and means we don't have as much freedom to advertise and solicit new business as I would have liked.

I'd imagine most businesses providing a product or service where there are economies of scale and potential to optimize production processes with experience end up going through the same progression. Hence the suggestion to start thinking early on about how to do price segmentation.
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k-vette

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Re: Never too early to start thinking about segmenting your market!
« Reply #1 on: March 03, 2017, 10:49:40 AM »
We're having a similar issue.  Our prices just got significantly lower, meaning we can charge less and pick up more customers, while still making more money. The problem is that some people are on different price tiers that don't make any sense.  We had people that were paying the lower price directly (and we took over that business)  So we're charging some people less so we don't lose them, while charging other better customers more.  It's going to be a long transition to get everyone on the same playing field.  We've effectively "grandfathered" in certain people at a low price, but have to raise it on them over time to make it fair to everyone else.

Vindicated

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Re: Never too early to start thinking about segmenting your market!
« Reply #2 on: March 03, 2017, 11:15:13 AM »
Would it be possible to offer a new lower price to your original customers in order to raise their order volume?  Of course, offering $50 v $200/unit would require a 4x order increase to make up for the revenue, so maybe $175 or $150/unit would encourage more volume from them.  I would be very hesitant to make an even lower tier.  Maybe just work on marketing to get more growth at the $50 level.

You definitely don't want them to discover that they're paying 4x more than other companies.  This could damage relationships.  I'd love to know more about your product/market though.  My current company runs on ~10% profit on average.  80% is amazing.  Great job on your manufacturing improvements!
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maizeman

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Re: Never too early to start thinking about segmenting your market!
« Reply #3 on: March 03, 2017, 02:34:13 PM »
Would it be possible to offer a new lower price to your original customers in order to raise their order volume?  Of course, offering $50 v $200/unit would require a 4x order increase to make up for the revenue, so maybe $175 or $150/unit would encourage more volume from them.

In general this is good advice. In our case, we know those big fish are already spending as much as they have in their budget for our product on us, so lowering the price might increase total units, but wouldn't increase revenue.

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I would be very hesitant to make an even lower tier.  Maybe just work on marketing to get more growth at the $50 level.

Agreed. We need to do a much better job of marketing. I'm not great at it, and I'm probably the most engaged in that aspect of the business of any of the original team.

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You definitely don't want them to discover that they're paying 4x more than other companies.  This could damage relationships.  I'd love to know more about your product/market though.  My current company runs on ~10% profit on average.  80% is amazing.  Great job on your manufacturing improvements!
Indeed. Part of the reason we're trying to differentiate the products as fast and as much as we can, so that if this ever occurs it'll be that they're paying 4x as much for a much better thing than other companies. But it is a very valid concern.

Hard to say much more about this business model/market without getting into specifics, but here are some generics: one of our major costs gets cheaper every year even if we don't do anything (think moore's law back in the day), our specific market as a lot of IP issue, including one notorious patent troll, which creates barriers to entry for new competitors, and our overhead is reasonably high even though our gross profit per unit is ridiculous. (So even after factoring in the big fish where gross profit is up to 95% unit now, the overall net profit per year of the company is more like 40%).
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Vindicated

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Re: Never too early to start thinking about segmenting your market!
« Reply #4 on: March 03, 2017, 02:51:53 PM »
So even after factoring in the big fish where gross profit is up to 95% unit now, the overall net profit per year of the company is more like 40%

So the production cost you're using doesn't include S, G & A?  We include it in all of our part's cost breakdown.

Either way, you guys are making a killing.  I'm very impressed.

Would you share details in PM?  I'm so intrigued about business specifics, as I'm currently looking at a bunch of different options for my next career move.  Maybe design engineering, manufacturing, currently doing sales engineering / operations. 
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maizeman

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Re: Never too early to start thinking about segmenting your market!
« Reply #5 on: March 03, 2017, 03:57:23 PM »
Correct, we're calculating the marginal cost to the company of selling one additional unit (well realistically 1,000 extra units). I'll send you a PM with at least a few slightly less broad generality than I'm posting here.
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CargoBiker

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Re: Never too early to start thinking about segmenting your market!
« Reply #6 on: March 03, 2017, 09:14:00 PM »
What I've learned from this experience is that I wish we'd done a better job of planning for a "good, better, best" branding strategy with different versions of our product targeted at the high end, mid-tier, and extremely price sensitive parts of the market from the start.

This is a killer money making idea, and one I've always got in the back of my mind for niches/business/products that I do.

Take Luxoticca for example. They own all of these eyeglasses brands.   It gives the customer an illusion of competition or choice. You're buying from the same company, no matter what choice you make.


Axecleaver

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Re: Never too early to start thinking about segmenting your market!
« Reply #7 on: March 04, 2017, 03:52:46 AM »
FWIW, we have the same problem in our consulting services business. We charge what the market will bear. I can get $200-250/h for unique skillsets and short term projects under a year. But the space gets super competitive on the more predictable projects - we're closer to $140/h for multiyear Medicaid projects. And that is an all-inclusive rate - still have to get my consultants to the project and pay for their meals and hotel.

Good post.