On Price, Value, Segmentation, Targeting, and Value Proposition
A while back, I started noticing an interesting tendency among guests staying in my Airbnb rental property. Customers who aggressively negotiated their price for accommodation were usually also more demanding, had more additional requests, and complained more during their stay. While those who were happy to pay the full price as advertised, generally tended to be lower-maintenance guests.
My first reaction was that of annoyance. Don’t these cheapskates realize that they are getting great value for money after the significant discount I just gave them?
Then, upon reflection, I ascribed this difference in behavior to personality. The squeaky wheel gets the grease, I thought. Guests who are willing to go through the trouble of negotiating a lower price are naturally also going to be more vocal about their needs throughout the duration of their stay.
I still believe that personality has something to do with it. But I have since arrived at a more actionable theory, from a business perspective, based on my experience working on pricing and designing value propositions.
“Price is what you pay. Value is what you get.”
My thesis is that while value is what a customer gets out of the service you provide, it is not entirely something you can control. And you need to target and serve your customers accordingly.
Let’s take a look at a typical demand curve.
A demand curve, such as the one above, is a mathematical function that represents customers’ willingness to pay for a product or service, given the value they get out of it. The higher the value they get out of a product or service, the higher the price they are willing to pay for it. And the value a customer gets out of a product depends on the fit between the characteristics of the product I have to offer, and those of the customer.
In this example, imagine I charge a particular price per night for my Airbnb rental, and have two customers: Customer X and Customer Y.
Customer X is getting Total Value Customer X, which significantly surpasses the price she is paying for it. On the other hand, Customer Y is marginal. He is getting just about enough value out of my Airbnb rental to justify the price he is paying. Customer X is getting a lot more value out of my Airbnb rental than customer Y is.
Who do you think is going to be the more satisfied customer?
Customer Segmentation and Targeting
This is why Customer Segmentation and Targeting are so important for the long-term sustainability and profitability of your business.
You want to select a very clear and focused target for your product, so that you can deliver the most value for that segment, while doing it as efficiently as possible.
When you have a very targeted segment, not only will your customers be more satisfied with your product, because of that better product-customer fit, but you also don’t have to incur in all the additional cost of providing a bunch of things that you know your particular target segment doesn’t need.
When you list the features you want in your MVP (Minimum Viable Product), what you really are saying is: These are the features that add the most value for my Target Customer, and that I can develop the most efficiently.
Developing a Value Proposition
Now that we have established that you want to focus on the customers who will benefit from your product the most, how do we go about giving them what they value?
I find that the Value Proposition Canvas (affiliate link), by Alex Osterwalder et al., is a great tool to narrow down the functionality set you absolutely need to deliver, given your target customer’s needs, which can be classified into:
- Jobs to be Done: What customers seek to accomplish.
- Gains: The benefits customers expect to receive by accomplishing those jobs to be done.
- Pains: What are the bad outcomes or obstacles customers face while trying to accomplish those jobs to be done.
Then you get to work, helping the customer accomplish their jobs to be done, maximize their gains, and minimize their pains while they’re at it.
When to Fire Your Customer
While the unease caused by a decision that will cause you to forego revenue is understandable, the real relevant questions are:
- Does keeping this customer make sense in the long term? Will the potential issues needing additional resources and attention to remedy them be worth it?
- What is the opportunity cost of serving this customer? Am I foregoing another customer who is a better fit, and less costly to serve, for my business?
- Wouldn’t this customer be better off with a product that is a better fit for his or her particular needs?
As a result, I am now very upfront with the characteristics of the property, so that guests know exactly what the tradeoffs are:
- It is very centrally located, but there can be a bit of noise on Friday and Saturday evenings when people go out and about, partying.
- It is an ancient and photogenic house with lots of character, but it probably isn’t for you if you are after something sleek and modern.
I really can’t control how sensitive to noise a customer is, or whether they value ambiance or modern conveniences more, but what I can do, is to control who I target, that is to say, who I accept as my customer.
Sometimes, potential guests decline to make a reservation after it becomes clear that my property isn’t a very good fit for them. Every once in a while, I even offer a full refund, after a short partial stay, in cases in which a guest and the property are an obvious mismatch.
In the end, I usually get another guest soon thereafter to replace the one I’ve just lost. And more often than not, this guest turns into a satisfied customer, because I have done the homework of tailoring my target segment to focus on customers who appreciate the characteristics of my house.
And I certainly don’t miss customers complaining or requesting ‘extras’ in the middle of the night.
A Leap of Faith or Just Good Strategy?
Success in business often requires a bit of courage, to take a leap of faith without the benefit of a safety net..
Saying ‘No’ to a customer, and to the revenue he represents, can also feel a little bit like that. But if you do your homework: Segmentation, Targeting, and Value Proposition, your strategy becomes your safety net, and if will feel less of a leap of faith, and more like just the logical and strategically sound thing to do.
Original article published in Medium.