Segments

Different market segments have different costs to serve. They must have, because they are different customers with different needs. Firms run into trouble when they forget this basic rule and average the costs of serving different segments together. This results in prices based on average costs which lowers profitability, since some customers are overcharged while some are undercharged.

The concept of segmentation is based on the idea that there exist different customer groups with different needs. Serving these needs requires tailored value. Since the value is tailored for each segment, pricing is not uniform across all the segments served. In fact, good segmentation requires that each segment commands its own specific price for the value being offered.

Good segmentation is a foundation for a good strategy. Choosing the right mix of segments to serve, offering tailored value, and pricing appropriately for each segment can increase earnings and erect barriers to imitation by rivals.

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