Category: Pricing

Segmenting your way to pricing profits!

Segmenting your way to pricing profits! For many, segmentation is the single critical factor that can drive a differentiated pricing agenda and therefore an accelerated route to profit growth. While this truth may be obvious to most, why is segmentation so difficult to implement in practice? Time and time again the gap between the theory of using segmentation for pricing excellence and the implemented reality seem to be very wide in many businesses.

So why is there such a gap between the theory and reality of good segmentation? A number of practical hurdles present themselves when it comes to segmentation:

  • There is the Data Segmentation Mountain to climb which is hard work!
  • There is segmentation, segmentation and segmentation!What level of sophistication are you able and willing to implement and how does it relate to perceived customer value?
  • The organisational and functional bias of the business will influence the segmentation. Is the segmentation drive more finance, sales or marketing led and how are these interconnecting influences integrated?
  • Segmentation “velocity” or its propensity to change is a dynamic that is often underestimated. If the segmentation cannot be kept up to date the whole framework for differentiated pricing quickly deteriorates.

1. The Data Segmentation Mountain

Data Segmentation Mountain 

The issue here is the complexity and size of data that needs to be segmented. Specifically this is a function of your channels or route to market, number of product items, your existing and prospect customers and then your market segments. Even with a limited number of product items, customers and channels the picture quickly gets complex e.g. 100 items x 100 customers x 4 channels = 40,000 elements to be segmented.

This then can be further complicated if the business works across more than one ERP system and where there needs to be a product and customer alignment between these systems. Master database management is a big theme within IT to ensure that customer records or product hierarchies are correctly mapped across various ERP systems. However, frequently these mappings do not include a more commercial and market specific segmentation. A market led segmentation would make sense to incorporate at the same time but unfortunately the organisational silos of your typical business seem often to hinder such an outcome.

Techniques for segmenting and categorising your data mountain exist and typically require a blending of business, data, analytical and IT capabilities. This blend allows for a systematic approach that can then process the segments even where the complexity and data load is daunting.

 

2. Segmentation vs segmentation vs segmentation

 

Segmentation will vary in sophistication partially because it is difficult to implement but also because business models work differently across industries and markets.

Segmentation & Ability to Price

The more differentiated a business’s customers can be segmented into value categories, the more a business can extract that value through differentiated pricing. Since value is related to the whole business proposition often involving intangibles (e.g. Service and Relationship), it is in fact the perceived customer value that counts. But this value segmentation needs to take account of the competitive or alternative options a customer is being offered before determining whether the value segmentation is real.

The mechanism to define value segments can take multiple forms depending on the industry and the ability to identify value drivers. Some of these may be behavioural (e.g. consumer behaviour for different occasions), others are linked to your contribution to a customer’s own value proposition, and then there are various market conditions that can also impact the perception of value.

So at its simplest form segmentation is typically about customer account size where a business will give better pricing terms for a large customer than a small customer. A more sophisticated approach will possibly look more strategically as to a customer potential and whether a market segment is attractive or not. At the most sophisticated extreme a business has systematically worked out a value based pricing segmentation where they fully understand their value to their customers and can defend their position against competitive alternatives.

 

3. Organisation or Functional Bias

 

Organisation or Functional Bias Are the organisational influencers of pricing coming more from Finance, Sales or Marketing? Typically the pricing agenda and therefore any implemented segmentation will be impacted. From a Financial perspective I will be looking, for example, at my gross margin and how the price relates to my costs. I may also be pushing for increased prices to improve margin but without necessarily fully understanding the market context and pressures. With the Sales function there is a tendency to look for aggressive pricing to close deals and often this pushes the organisation towards a customer account size segmentation. Ideally the Marketing function is able to look beyond the more short term influences that can come from Sales and Finance and drive through a segmentation that takes account customer and market value differentiators as well the product life cycle.

 

4. Segmentation Velocity

 

Segmentation Velocity 

In practice making the segmentation a manual exercise is likely to end in failure. The best approach is to frame the exercise by a logical hierarchy from which various algorithms can then be used to drive the detail of the segmentation. One way is to be market and customer led while for others it may be a product based segmentation. So yes part of the work is manual but only at a high level and then the detail gets allocated based on a number of business rules. Ultimately a rules based segmentation is the best way to keep the segmentation framework up to date and relevant.

 

Author: Patrick Mosimann

 

Posted on February 18, 2017 by Danielle Mosimann

Is there ever a good time to do a price increase?



The short answer: NEVER and ALWAYS!

The longer answer:

A price increase is always difficult to achieve successfully and yet doing nothing is a gradual recipe for financial disaster. Why? Your costs are never static, so within 5 years your profit margin could easily be ZERO.

Cost Inflation Impact on Profit without Price Increase



Of course good cost and supplier management can counteract this trend and is a very common and effective strategy BUT, ultimately you cannot “cut” your way out of a profit gap without damaging the long term viability of the business.

 

Price Increase Cartoon

 

Price increases are difficult because no one believes it’s easy to implement, neither are they acceptable to the customer nor seen as competitively achievable.

It is certainly not easy to analyse and think through the various implications of a price increase; OK 10 customers and 10 products might be easy enough (10×10 = 100 customer price combinations), but since most businesses are dealing with 100,000’s price combinations the implementation complexity is usually very significant.

Also the taboo of communicating a price rise usually raises strong emotions and outright fear by sales reps. “What will the client say”, “I’m going to be crucified by procurement”, “I’m going to lose the contract (and my bonus)”…

The internal resistance, especially by the front line, is therefore understandable and real, often leading to internal political lobbying to neutralize or partially counteract a price initiative. All this can become quite heated and damaging if left unresolved.

Of course both camps of the argument, to increase prices or not, are both partially right. The competitor angle especially tends to be the key argument against any price increase – “we are going to lose share”, “the competitive alternative is better value at that price”. And, while this is obviously very true, it is also a common and dangerous excuse. This rational argument about a competitive threat can become a slogan around which all the other reasons and resisting stakeholders attach their defensive flag to the “no price increase” mast.

As always the issue is to find the right balance and truly understand where the price increase opportunities lie. Of course the high volume product items (SKUs) are candidates that need extreme caution since they are typically the headline product from which most clients and competitors can compare and undercut. But, in that complex mire of the product detail are typically interesting opportunities and pricing nuggets.

Looking at the pricing increase challenge from the point of view of mining the data complexity usually offers up some interesting and tactically defensible opportunities. These will vary in rationale, for example: legacy product, servicing opportunities, supply chain performance, product or customer tail, volume commitments etc. Thinking through a range of business rules and criteria and positioning these correctly will offer a number of on-going reasons for increasing prices that are both defensible and sustainable.

Taking such a granular and more targeted approach to price increases will offer a multitude of small incremental options. The approach will typically leverage a multi-segmentation approach and can typically lead quite easily to 2-3 margin increase to add to that bottom line. By managing a tailored, adaptive and structured approach to pricing that uses complexity to its advantage you can avoid many of the pitfalls of reckless price increase initiatives.

In short, the best approach to pricing is finding opportunities in the difficulties and constraints that others prefer to avoid. A business’s capability to navigate complexity will also avoid the trap of a top down reactive edict that compels the business to increase prices or drive effort towards premium segments without a sound approach and rationale.

So yes there is NEVER a good time to do a price increase but equally you ALWAYS need to consider doing so despite the difficulties and reasons not to!

Author: Patrick Mosimann

Posted on January 12, 2016 by Danielle Mosimann