How to segment customers by their behavior?

by 

Maciej Wilczyński

 in Monetization and Pricing

Monetization & Pricing

October 24, 2022

Find out what price sensitivity is and how to use it to segment your customers in the SaaS industry.

When you find a perfect model of shoes, do you just go to the store and buy them, or are you patiently waiting for seasonal discounts? Do you prefer to pay for easy and immediate access to the product, or are you ready to spend, for example, your time in exchange for a better price?

SaaS customers face such choices daily, and they fall into the more or less price-sensitive customer segment depending on their choices. And you, as a CEO or a Product Manager, want to know how important the price is for the individual groups of your users to sell, promote and price your product optimally.

So how exactly do you create price sensitivity segments, and why even do so?

What is price sensitivity?

Price sensitivity determines how much the price of a product influences the customer's willingness to buy it. In other words: what is the role of cost in the process of purchasing a product? How much effort can the user put into lowering the price to buy something?

Let's return to the shoes. So when you finally realize that you are ripe for the first pair of Crocs, do you just buy them from the official website? Or would you rather dig the Internet for discounts, wait for the summer sale, or sign up for the newsletter to get a promo code?

If you identify with the first buyer, you are price-insensitive and can pay a higher price in return for the comfort of "here and now." And suppose you are closer to the second example. In that case, you fall into the "price sensitive" segment and are ready to devote your time and energy to find a better deal.

Why does your users' price sensitivity matter?

Price sensitivity directly correlates with one of the most critical SaaS metrics, Willingness To Pay. As a rule of thumb, the lower the price sensitivity, the greater the WTP, and vice versa. And as I wrote in this article, every business owner should be aware of the WTP of their users (and therefore their price sensitivity) to monetize the product optimally. That is, value it as much as people are willing to pay.

If you don't know the price sensitivity of your users, then you will never use the full business potential of your SaaS. On the other hand, if you segment your customers well according to their price sensitivity, you can consciously adjust the pricing strategy to their WTP. And not just the pricing itself, but sales and marketing strategies too.

Price sensitivity and customer segmentation

In the classic approach, segmenting customers means grouping them according to specific identifiable metrics such as age, gender, and education (B2C) or company size, location, and specialization (B2B). For the user to provide this information, you must request it, for example, in the registration form.

It's slightly different with price sensitivity; you cannot determine it other than through the user's behavior. Therefore, to divide your users by price sensitivity, you must create an appropriate purchasing process that allows them to self-qualify.

At this point, it's worth recalling that price-sensitive customers are willing to take the time and effort to find a better deal. They will look for alternatives on the Internet, compare price offers in detail, and even invest money in the short term to pay less in the long term.

Price-sensitive customers will be ready to overcome obstacles only to pay less. Conversely, price-insensitive customers will pay more to avoid these barriers.

In that case, to separate one from the other (or rather, for one to separate themselves from the other), all you have to do is to...

Put obstacles in front of them.

Examples of obstacles that help your users self-segment

Below you will find example hurdles that help SaaS companies segment their users. However, to be clear: user segmentation doesn't have to be (and often isn't) the ultimate goal of a given strategy, and user choices aren't always so clear and straightforward. For example, promo codes are usually a way of settling finances between the company and the ambassador, and not everyone who signs up during a sale event is price sensitive. Nevertheless, even if user segmentation in the examples below is only a side effect and may be a little simplified, it still shows a trend you can modify according to your product.

Discount codes

Grammarly is one of the sponsors of Lex Friedman's podcast on AI. Lex talked about the tool at the beginning of each episode and provided a unique link that reduced the premium subscription price by 20%. Currently, information about sponsorship and promotional code appears on his page.

People who use codes are usually more price-sensitive. Some of them decide on the tool only when they get a discount. Some wait for their current subscription to expire and enter the code when it's time to renew. Before buying anything online, others first look for promotional codes wherever they can, including websites that collect and provide discount codes. And many SaaS companies use this strive for promo codes to segment their users.

Sale events

SurferSEO, a Polish search engine optimization tool, launched promotional events on Black Friday. Every account that signed up during that period got a discount. Additionally, the company added an element of gamification to it: the more accounts registered in the specified time, the bigger the discount for every participant.

Sale events of this kind are a great opportunity to segment customers according to their price sensitivity. Many savvy users (including b2b companies) patiently wait for an event like Christmas, the end of the quarter, or Black Friday to buy a subscription at a lower price. On the other hand, less price-sensitive customers usually don't care and sign up for things simply when they need them.

Loyalty Club, newsletters

Subscribe to the newsletter and get a 10% discount. If you are price sensitive, you surely know this mechanism from your own experience. Customers who subscribe to the newsletter with the promise of a better deal exchange their privacy (and a little effort) for a better price. And, at the same time, self-segment themselves as price-sensitive.

Referral program

Each Uber user has a unique code in their app that they can share with another person. If this person uses it during registration and completes a certain number of trips, the user gets rewards. Interestingly, Uber allows you to track how many orders are missing for the person who received the code and their progress in performing the relevant tasks.

Users who participate in the loyalty system are usually price-sensitive. They are ready to get other people into the app to get a reward in the form of a discount or money to spend.

Which of your users is price sensitive?

Of course, all the above hurdles are just popular examples from the SaaS world, and you can't replicate them in all software products. However, each industry has both price-sensitive and insensitive users, and each can come up with obstacles that will separate one from the other.

So what obstacle can you put in the purchasing process to make your users do the job for you and segment themselves?