Now we will talk about what it means to price to demand curve. In the previous sections, we introduced all the concepts necessary for this. We talked about customer value and how it differs between individuals. And as a business you want to create groups of customers with the same values and therefore, segments. We discussed what willingness to pay really is, and how a demand curve is a plot of exactly this willingness to pay. Now price to demand really connects all these four concepts. Let's look at this demand curve here. You have quantity on the X axis, you have price on the Y axis. We chose a certain price point which will then lead to a certain quantity, and this gives us our revenue. And you also see here the un-served demand because we are priced too high for what these customers are willing to pay. And you see here the surplus, meaning where we under-charged the customers, they would be willing to pay more, but we're not charging more. Now ideally, to kind of create the theoretical maximum, you really want to have all the surface under this demand curve. And what this means in theory, is that you sell to every customer exactly to the price they are individually willing to pay. Now, that's not really very practical. So how do you solve for this impractice? The objective is to trace the demand curve as closely as possible and let me give you a little example about refrigerators. You can get a very basic refrigerator, single door, freezer on top, wire shelving for, let's say $400 and it serves it's purpose, but it's not fancy at all. Or on the other extreme, you can get a super fancy luxurious stainless steel double-door, double-compressor, glass shelving, LED lighting fridge that would be priced a lot higher. What am I'm talking really about here is to introduce the idea of offerings that are tailored to the segments. And you have a fridge that is the premium segment. You have a fridge that is tailored for the value segment, and you have something in between. Now, what this does is, it really helps to reduce the surplus within each of the segments. But because you also now with the value segment capture a big part of quantity, it also made a lot smaller the minimized, the un-served demand. So you might ask, so how many customers should I serve and wouldn't it be best to serve as many as possible? Let's discuss this a bit, but I'd like to give the question a slightly different twist. Let's understand first what does it take to actually serve a customer segment and in my mind, there are kind of four pieces that have to come together. First, you need a very good customer understanding because you need to understand what is really that drives the value. You have to then identify the different segments and what is important to each of them, and you have to articulate a winning value proposition. Second, you need to have capabilities and assets to actually deliver on this value proposition. So in our fridge example, you need to have the technology. For example, for digital controls, you need to have capacity in your factories to actually build all these low priced value fridges, and you need to have a brand that appeals to your target segments. And a brand is something that is difficult to stretch too far. Very rarely do you have something that you have successfully operating in the value segment and the same brand then is successful in the super premium segment. Next is, you need to think about how you access your customers. How can you reach them effectively for marketing and communication and how do you sell to them through what channels? While you can sell a value fridge in a big box store, for the super premium, you can't even find them in big box stores. You really have to go to a kitchen design studio where you can take a look at them and order them. And lastly, serving multiple segments really drives the complexity in your organization, in your business, so you need enabling economics. What I mean by that is, a favorable cost structure. Each segment must be big enough for you to create some scale effects and you need to have sufficient pricing power when you're negotiating with your channel partners. So you can see that serving segments and multiple segments at a time is actually not trivial. So the short answer to the question, how many customer segments should you serve is, as many segments as you can do effectively, and serve profitably. But there's a bit more to say. Let's say you realize you really should stick to one segment in your business because of multiple reasons. There is still within the segment and let's say you pick here the mass segment, there is still undercharged demand in it. And you can try to optimize for this by further differentiating your offerings to sub-segment the business. So let's talk fridges again. Let's say you have an entry model side-by-side fridge. Now you can think of different features and additions you can have. You can take the basic wire shelves and upgrade to glass shelves. You can add an ice maker or you can have features that qualify you for an energy star because of energy saving features. And each of these features would suggest that you can charge a little bit more and therefore, capture a bit more of your willingness to pay in your segment. So let's recap quickly. There are two ways to go about it. First, you identify your biggest segments. In this case, we call it premium mass value. Often times in retail, it's also called good, bad, or best. Once you have that established, you think about how you further sub-segment, and systematically differentiate your products and pricing within a segment.
