Wholesale & Distribution International - Winter 2018 - 13
WHY SEGMENT PRICES?
ATTRIBUTES TO CONSIDER
A number of basic attributes are typically
relevant across many different types of
businesses going through the segmentation process, no matter the industry.
These include such things as region, industry or customer size, product category or end use as well as purchase volume.
But beyond those, organizations need to
drill down into segmentation dimensions
that are tuned to the realities of their particular industry and markets. Here are
the 5 most common:
1. Contracted market basket items
versus on-contract items: Among
the million or so items distributors
might stock, customers will negotiate heavily for only a handful. These
so-called market-basket items are
the ones customers buy frequently
and will typically comparison-shop
among a number of competitors to
achieve the best possible prices.
2. Commodity versus non-commodity: Think about an office-supply
distributor. A failure to price segment sheet paper from larger, colored paper that customers are willing to pay more for means money
has been left on the table.
3. Product with pricing linked to a
commonly watched index: As you
segment for price optimization, ask
yourself whether you have products
that are based on some other outside influence. If so, these should
be grouped together on a separate
branch of the segmentation tree.
This will make price updates easily
actionable and less labor-intensive.
4. Private label versus branded product: Obviously, you want to ensure
that the sell price of a private-label
item is lower than that of a corresponding branded product. But at
the same time, the business doesn't
want to lower that price to the point
where it gives away everything it negotiated to get a better cost on that
5. Stage of a product lifecycle: To improve the reliability of your segmentation model, another consideration
is the stage of the product's life cycle
along with other important product
dimensions. Consider increasing
prices on certain high-demand but
discontinued product types because
they're being phased out. This way
you can maximize what you make
before it goes off the market. In other product categories, late in the life
cycle might mean close to obsolescence. In that case, you will want to
lower prices to make space in the
warehouses for the soon-to-be-released updates to that same product.
The central goal behind any price optimization strategy is to align the price with
the perceived customer value for any given product or service. Different customers perceive value differently across the
same product or service being offered. By
identifying these differences, pricing can
be optimized across the various customer
segments and overall margin can be optimized. It sounds simple in principle, but
achievement can become a complex task.
Consider the countless combinations
of customer, transaction, product and
market factors at play for every single
pricing decision you can make. While the
idea of addressing each and every possibility sounds tantalizing, there's simply
no logistical way to manually tailor prices
for every single transaction or deal you
make with your customers. It just doesn't
scale, particularly in the distribution
world where you're dealing with millions
of products and thousands of high-volume customers while negotiating with
both suppliers and customers.
Savvy organizations will look for an
edge in pricing by grouping customer transactions into compelling peer
groups, and then basing prices on the
best estimation of the perceived value of a transaction for anyone within
that group. If an organization can cluster customers in such a way that they
share the same willingness to pay for
particular products, it will win against
one-size-fits-all pricing and maintain a
model that is simple enough to sustain
long-term. This is the fundamental principle behind price segmentation, which
should stand as the foundation for all
future price recommendations.
Generally, you should start by looking
at historical data for all customers within a
given segment, then overlay current market factors that would not be seen within
historical data to get price guidance for future deals within that peer group.
The segmentation assumptions you
establish today will determine the prices
you set tomorrow. If those assumptions
aren't based on the realities of your business model and key data elements, you
could be setting your price optimization
efforts up for failure.
Kim Long has more than 25 years of
professional experience in the distribution
industry ranging from product management
to procurement and pricing. Prior to joining
Vendavo, Kim worked at OfficeMax where
she was the senior director of pricing for the
B2B business and was responsible for pricing
strategy, profit management, performance
measurement and process re-engineering.
For more information, visit www.vendavo.com.
Winter 2018 www.wdimagazine.com