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Pricing Challenge: Segmentation

Posted by Chris Jellen

Use segmentation and differentiation to drive target price

Welcome back to INSIGHT2PROFIT’s 2019 Pricing Challenge! Each article covers a common pricing challenge faced by businesses and provide some tips to help improve your profitability.

Let's think about target price – not your list price, but the price you want your customer to ultimately end up paying after accounting for discounts, surcharges, and other factors (like tariffs!) – and how to optimize it through differentiation and segmentation.

Have all your customers been buying from you for the same amount of time? Are all the orders you receive the same size? Do all the products you offer have the same number of competitive suppliers? Of course not. It stands to reason, then, that your target price should not be the same across customers, orders, and products. If you’re treating pricing in a uniform manner, you’re overpricing in some situations and leaving money on the table in others. Instead, you should set different target prices based on both the value customers offer your business and the value you offer them.

Common Value Drivers

Customer Factors

  • Customer Size
  • Share of Wallet
  • Sales Channel

Order Factors

  • Order Size
  • Lead Time
  • Freight Needs

Product Factors

  • Grade/Quality
  • Competitiveness
  • Life Cycle

Let’s pretend for a moment that you’re a sales rep, and two identical orders land on your desk – one is from a small, long-time customer that has an urgent need, and the other is a one-off order from a big customer you’ve been trying to land for years but haven’t had any luck with until now. Do you charge them the same amount? Do you need to reach out to three people to approve a price deviation, creating a delay that causes you to lose the order? If your company employs an advanced pricing process, you have guidelines in place for what target pricing to offer each of these customers.

Having differentiated pricing ensures that you’re getting the optimum target price with every sale. Although each situation will be unique, using segmentation to understand and quantify the core value drivers in terms of products, customers and individual orders means pricing doesn’t have to be complicated.

Watch this short video to learn more about how segmentation can take the guesswork out of determining your target price.

What’s your pricing challenge?  Talking about pricing challenge, if you haven't downloaded our 3 Steps to Navigating Tariffs Guide, you may want to do it now!

Topics: For Pricing Managers , Pricing Strategy