It’s one of those early lessons in business – understand who your customer is, segment your audiences, don’t sell to the ones you can’t service profitably, and try to capture as much of the available value as you can from each group. Businesses that do this well can thrive. Those who fail to pay heed to this rule tend not to last very long.
It sounds crass, but it’s a reality of business. This is what Apple does when it charges more for a newly released iPhone. Apple knows there are devotees who will pay to be the first ones to have the latest new Apple gadget. And once they’ve bought it, Apple drops the price to open its appeal to a larger audience.
No one faults Apple for this. But making this work isn’t always easy.
In 2004, Best Buy decided it had a group of customers it was losing money on and, therefore, didn’t want. These bad customers would buy several similar products, try them out, and then return some or all of them. Best Buy was then stuck selling the returned products at a discount. The worst offenders would return all of the products and then purchase the one they liked from a cheaper online retailer or re-buy the returned product from Best Buy at an open-box discount.
Best Buy’s solution was restocking fees. It was a clear way to deter this group of customers who were gaming the system. Unfortunately, it also makes the buying experience at Best Buy less attractive for all of their other customers.
This is where segmentation gets tricky. There is often a tradeoff between your ability to treat different customers differently and the experience they are left with.
Enter Southwest Airlines and their “Customers of Size” policy.
If you’re not familiar with this particular quirk of America’s most popular airline, here’s how it works: if you are a large person – large enough to be unable to lower both armrests – then you must purchase two seats. If this is an issue for you, you are encouraged to purchase two seats proactively, as many flights are fully booked and you may not be allowed to stay on the plane if another seat isn’t available for you.
Southwest, like most other airlines, crams us all in like sardines. Southwest is betting that the majority of passengers will have a better experience if they don’t get crammed in next to someone too large for their seat.
Needless to say, it has been a controversial policy and the airline has received its share of criticism. The policy has caused a lot of drama this week when actor and director Kevin Smith used Twitter to take his anger to his 1.7 million Twitter followers.
So this is the danger in segmenting. Does the benefits that Southwest gains from the goodwill of customers that aren’t at risk from the policy, plus some additional revenues from those buying two seats counter the negative PR from a not so Silent Bob?
Southwest seems to think so. They’re standing by their policy and I dare say that they appear to be enjoying the attention. Perhaps, in the end, this helps them publicize a segmentation strategy that they’d never be able to market explicitly. We’ll just have to wait and see if Southwest starts bumping public figures more often in the future.