Recent articles and blog postings are abuzz with the power of price segmentation, driven by the abundance of transaction data and the power of pricing analytics to create highly-tuned segmentations to capture customer willingness-to-pay. Some analytics create hundreds—even thousands—of micro-segments to maximize profitability by exploiting the differences in willingness-to-pay within your installed base. What’s not to like about this? Sounds like easy money to me. However, there are some embedded assumptions about price segmentation that pricing professionals need to consider:
Price segmentation is driven by historical data. Business, competitive, and customer conditions change too fast to stake your future profits based on your past. New competitors enter, customer procurement teams play poker and win a bigger discount, or your own product/service development teams create differentiated new offerings.
- Willingness-to-pay is not fixed. Compelling messaging, tuned to each customer’s business model, brings home the value you deliver to your customers and increases willingness-to-pay. Likewise, a shift in pricing metric can turn the tide. Consider the impact of SaaS cloud offerings in converting capex to opex and putting decisions within the budgets of business unit managers
- Innovations risk underpricing. We all know the adage—it is harder to raise a price than drop it. Hence, the biggest pricing mistake is underpricing new product launches. Avoid backwards-looking price segmentation at all cost here
- Transaction price analysis is an essential tool, but to get at the best price don’t forget the customer. Learn how they each make money and how to positively impact that. It is never too early to bring the customer into the discussion. The role of the savvy pricer is to use all the tools at his/her disposal
Step One: Mine historical transactions, along with the insights of your internal staff, to build a case for how your product and services drive value for your customer. Then, build a simple profile of which customers pay more vs. less—hint: skill of the sales rep may be one factor
Step Two: Go out and talk to your customers. Based on the internal case for value, ask your customers if they agree and what impact your value makes in their operation. Understand how your products and services provide bottom-line value. Is it by reducing costs, enabling cost-effective entry into new markets, or reducing business risk? This dialogue enables your sales reps to change willingness-to-pay and gives your pricing team the green light to higher prices.
Despite the power of historical data, some of our day-to-day behaviors can cause our profits to evaporate before price analysis can even diagnose it. We'd love to send you a whitepaper on some of the hidden causes of these disappearing profits, and tactics to combat each. Click below to download: