Do: Leverage the Iron Law of Pricing: Different customers will value your products and services differently. Savvy companies look at their marketplace and identify their most profitable customer segments. They do cost-to-sell and cost-to-serve analysis, and they have processes and a single customer database with data tags that identify their marketplace's purchase and price drivers.
A company in the distribution chain recently needed to figure out what value both their customers and suppliers attributed to their distribution services. They approached a price consultancy firm for help and their research conclusively showed that the company would actually be able to double its prices. However, the CEO with more than 30 years in the business was skeptical about these findings. He said that he "knew" the market and knew what his customers would be willing to pay, so he decided to increase the price by only 25%. Nevertheless, the results were overwhelming. The company's sales volume went up 30% and the average sales cycle time went down 30% -- a result of a non-linear price elasticity curve. When the prices were increased, the customers attributed a higher value to the company's product, which made it easier for them to make purchase decisions. With the old price, customers thought it was "too cheap and cannot be any good."
Do: Find a segmentation scheme that works and apply it rigorously. Companies should tag every customer and every prospect with Market Segment tags, so all of their analyses can look at the costs, revenues, and rates of change and profits by market segment. They should be wary of shortcuts like SIC code, which are generally available, but rarely sufficient.
Once a company has a segmentation system in place, they should perform cost-to-sell and cost-to-serve analysis so they can identify which segments to grow. They should also build bundles of products and services that tailor their products to the precise needs of their targeted market segment. The bundles allow them to raise or lower prices in a given marketplace without changing their overall price list. They also allow companies to deliver targeted products and services.
Don't aggregate your data at too high a level. The important differences between groups of customers are the basis for substantially improving a company's profits. Companies should be sure their marketplace segmentation scheme is sufficiently detailed to allow them to uncover, understand and leverage the important differences in buying motivations, patterns and policies.
For example, a manufacturer of business-to-business products utilized five unconnected customer databases for their marketing, sales, customer support, shipping and finance departments. The company had anecdotal information on why they were successful, but their databases had no basis for building profitable market segments so they could only do general marketing and they had to set their prices to an "average." However, competitors with better targeting capabilities began to pick-off the most profitable segments. The competitor had substantially lower costs because they served only a few segments, but they had higher profits. This competitor constituted a serious threat to the company's customer market leadership.
Another classic example of this mistake is when an automobile manufacturer decided to sell their 4-wheel drive vehicles only in ZIP codes where snow was expected. Later market research revealed that the "coolness" of 4-wheel drive also made Florida and Southern California, locations with hardly any snowstorms, prime markets for these vehicles. But, had this company maintained sufficient data in their customer database and done research to define their market's buying preferences, they would have known this ahead of time.
All too many companies use simplistic pricing schemes and processes. They cannot identify their most profitable customers or customer segments. They do not know why customers buy or don't buy, and what they are willing to pay. Instead, they rely on stories and guesses.
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