The Biggest Impediment to Price Segmentation

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This blog frequently emphasizes the importance of charging different prices to different customers based on their willingness to pay.  However, it has never acknowledged the challenges to implementing this as a strategy.  Recently, I’ve run into several companies who can’t implement this extremely profitable strategy for one HUGE reason.  Their systems don’t enable it.

If you know a company in one industry will pay more than a company in another industry, do you have the ability to quote different prices to these two companies?  Then, if you get an order from both of them, can you invoice different customers the correct pricing?  These are the two biggest sticking points.

Quoting

Companies who mostly use a direct salesforce usually don’t have a problem with this.  The salespeople negotiate prices (i.e. discounts) with each customer.  The types of companies that can justify direct sales forces typically sell large deals to other businesses.

Companies (or the portions of companies) without a direct salesforce need a systematic method to quote different customers different prices.  SaaS and eCommerce companies often publish their prices on their websites.  Yet many of these companies still find ways to segment their pricing.  Sometimes they segment by geography, some offer coupon codes, some create different versions of their product for different market segments and charge appropriately.

Companies that sell through distribution often have published price lists, yet many are able to publish different price lists for different types of customers.  They have the systems in place to manage and monitor these price lists.

No matter how you think you might want to segment your pricing, you need the ability in your system to implement it.  Are your systems capable?

Invoicing

A less common impediment is the ability to invoice.  However, some older accounting software packages don’t make it easy to charge different prices for the same product.  They require a price for a product.  You will want to check with your accounting organization to see that this is feasible.

Action items

Here is what you should do – Check to see whether or not your systems, both quoting and invoicing, enable price segmentation.  You will find one of three possible answers:

1.  They are fully flexible and enable any type of price segmentation (Customer characteristics, transaction characteristics, and behaviors).  If you are lucky enough to find this is the case, then you should focus on determining which segmentation methods will give you the most return and go implement them.

2. They enable some types but not others.  Any accounting system will allow you to segment based on product since you are simply creating a new part number for essentially the same thing as another product.  Instead, focus on the ability to price segment on customer characteristics, transaction characteristics and behaviors.  You should learn what types you can implement and do your best to take advantage of them.  Consider pushing for better systems (see 3 below).

3. They don’t enable price segmentation at all (or very limited).  Consider taking this on as a project inside your company.   Convince your own company that profits will increase as you implement price segmentation.  It won’t be an easy transition, but it is almost always worth it.  If you are able to drive the transition, and you can measure the results, you will look like a hero.

 

Photo by Patrick Finnegan