Customer Segmentation

The two consultancy teams have produced a number of different scenarios to consider in
terms of customer segmentation. Both teams suggest that reservation prices for nail
brightening cream vary by segment – but the consultancy teams have proposed different
segmentation schemes. The in-house consultancy team has suggested a demographic gender-
based segmentation (male versus female), while the external consultancy team has suggested
a benefit-based segmentation (health versus beauty). Interestingly, the benefits-based
segmentation is largely driven by gender-specific needs. In many of the scenarios provided
by the external consultancy team, many women (but not all) want nail brightening cream for
beauty reasons (prettier nails), while most (but not all) men want the cream for health reasons
(healthier nails).

Both teams provided Kelly with different scenarios in terms of the size of the respective
segments they have proposed and the reservation prices associated with those segments. To
keep it simple, the teams have given Kelly the reservation price for a representative consumer
in each segment, knowing that they can later examine the variance in this reservation price
within the segment. The teams want Kelly to understand that pricing decisions can be very
different across these scenarios.

Exercise 1: Demographic (Gender-Based) Segmentation

Data provided by the in-house consultancy team
The in-house team has provided Kelly with the data below, to decide whether to offer a
gender-neutral version of the product or two separate (male and female) versions of the
product. Case 1 shows four scenarios in terms of the market for the nail brightening cream.
The four different scenarios reflect the reservation price (the maximum price a consumer is
willing to pay) for the nail brightening cream.

In each of the four scenarios, Kelly needs to determine what price to charge if she has:
1. only one gender-neutral version of the product
2. two versions of the product: a male-specific version and a female-specific version
Assume that:
• Cost=$0.50 and also that the fixed cost of having a male and female version is about the
same as having a gender-neutral version.
• The consumer’s reservation price for a gender-neutral version of the product is the same as
her (his) reservation price for a female (male) version of the product.
• If male and female versions of the product are available, the males buy the male version and
the females buy the female version (and they will not buy the product if the price of the
version for their gender is more than their reservation price).

Exercise 2: Benefits-Based Segmentation

Data provided by the external consultancy team
The external consultancy provided Kelly with a different segmentation basis and different
scenarios.
Assume that:
• Cost=$0.50 and also that the fixed cost of having a single version and two versions of the
product are same.
• The consumer’s reservation price for a health & beauty version of the product is the higher
of the reservation prices they have for the health version and the beauty version, i.e.,
reservation price (health & beauty) = Max {Reservation Price (Health), Reservation
Price (Beauty)}
What is the best price for Kelly to charge if she has:
1. only one health & beauty version of the product
2. two versions of the product: a health-specific version and a beauty-specific version

Kelly’s Problem
Kelly wants to understand how all the different scenarios the consultancies have proposed
will affect her product versioning and pricing decisions. So, she will do two separate
analyses, using the data from each consultancy team. In each analysis, she wants to figure
out:
• Should she offer one version of the product or more than one version?
• What should be the basis for the difference between versions?
• What price(s) should she charge?