Blog & Opinions
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
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.
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
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
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.
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