Pricing Leadership

If you are a pricer, marketer, or are in the market for a pricing optimization solution, you have surely heard about “segmentation” and probably have some questions about exactly how it will help you do your job better. I’d like to share some insight from a high-level perspective of how this can help.

Even before the time of the Assyrians, people were segmenting their customers, trying to determine what they would be willing to pay for a particular good. However, we have moved from local markets, where a trader may know all of his or her customers, into today’s varied markets, where businesses may have thousands to tens of thousands of customers. How can a business know each of these customers’ willingness-to-pay for each product they have to sell?

There are many ways of estimating this willingness-to-pay. Most companies have some sort of a “marketing” segmentation, derived through common sense ideas about their product and its value to a particular customer set as well as analyses of customer groups, often via focus groups or survey-based methods. While these methods are good, they suffer from two basic problems: the segments tend to be large, and if a survey method is used, it is subject to interpretation or bias.

Scientific segmentation uses facts that exist in a business’ data to generate micro-segments and isolate small groups of customers, products, and transaction sets (including channels) who have similar willingness-to-pay. The data sets can be entirely historical or include some evaluation of future demand, but they are based on real world data. The challenge is to identify segments such that they are small enough to meaningfully identify willingness to pay but large enough to still contain variance in the data, for the value in segmentation is in the variance: identifying which customers are UNDERPERFORMING their peer group and correcting prices to those customers.

The segmentation process uses attributes to create these micro-segments that often go far beyond what are considered in marketing segments. For example, in the much sought after “25 to 40 year old single male” market segment that many consumer electronics companies target, chances are that a particular customer’s willingness to pay depends on many more factors than his age, gender, and marital status. Including additional attributes such as income level, geographic location, and others starts to get a better picture.

The end result is a segmentation of your customers, products, and/or transaction types – whatever is appropriate for your business. These segments can help you identify a multitude of things: what price to charge for a given transaction, what terms should be on a contract, what products to bundle together, or even what products to offer at all.  Having a granular approach to segmentation along with a process for implementing pricing decisions influenced by these segments can dramatically increase a company’s profitability.

Guest Blogger – Matt Johnson, Managing Partner, Simon-Kucher & Partners

With 20 years of pricing experience, Matt Johnson is a recognized expert in price optimization software and processes.  His experience includes manufacturing, distribution, industrial, chemical, semiconductor, and electronics.  A former PROS employee, Matt recently took some time to talk to a group of high-tech manufacturers and PROS executives at the PROS Price Optimization Leadership Seminar - Santa Clara.  Check out some highlights from his session on pricing best practices.

“I remember working with PROS when SARS and 9/11 hit.  We had customers 30 days later up and running with new pricing strategies – full speed.  I love your IT department, I’m sure they’re all brilliant people, but I seriously doubt they’re up 30 days later with all of the conditions records from SAP re-tweaked and whatever homegrown system is up to speed.” 

John Salch recently posted a great blog about removing the boundaries of technology – allowing your sales force to use tools they are already comfortable with, yet still providing key information to make great pricing decisions. One of the most important pieces of information you can provide is knowledge about a specific customer, the product their buying and what other customers, just like this one, are willing to pay.

Most B2B Manufacturers and Distributors provide their sales forces with limited information. Sometimes it’s just the cost. There is almost always a hard floor (e.g. 10% margin). In more sophisticated companies there is access to the average sale price for a product across all customers. Finally, peer performance is ultimately used to benchmark one sales person to another, regardless of product or customer mix.

A better way to measure your sales force, as well as empower them, is to give guidance on where the price should be as it relates to similar products and customers. Some of your customers require deep discounts due to their large volumes, industry, competition and purchasing behavior. Other customers cherry-pick. Others use you as fodder to get better pricing from their preferred vendor. Sales people know this instinctively, yet management has yet to measure them appropriately on these key factors.

Segmentation allows companies to correctly classify different customers and the product they buy. Each unique sales situation can be correctly identified. Moreover, the historical patterns for similar customers buying similar products are used to generate pricing guidelines that make sense given the current selling environment.

I’ve had the privilege of seeing companies use a science based approach to classify customers, product and purchasing environments. Interviews with sales people and those that approve pricing reveal the appreciation for intelligence behind guidelines. Here are some actual quotes:

• “I’ve been using the target price more often than the stretch, mostly on new items not ordered previously. Nothing drastically different than normal pricing. No customer’s have called me on changes. Depending on the customer, I’m much more likely to use the tool…”

   

• “The software has some clear logic behind it. As I change the quantity and buying situation, I see very different pricing.”

   

• “I am using PROS daily and finding that I usually am increasing pricing based on Target and Stretch data. It is also a big help when I am quoting or ordering a new product because I am finding that I would usually price below target without the data so now I am not leaving money on the table. Periodically I will lower a price if it is higher than stretch for a customer. I believe the system is very valuable.”

   

• “I’ve always priced this part at 14% GP, but the floor is at 17% so I’ll definitely be increasing the price.”

In today’s market, all companies are looking for ways to protect margin and drive incremental profits – why not empower your sales force at the same time?

Recently, we have seen many companies attempt to implement with little oversight to the overall, “global” picture.  Now, before I continue, notice I did not specify what they were implementing.  It could be as simple as a new approval process or as complex as a new ERP system.  Also, one could easily replace “global” with any other contextual word that refers to “more than one”, but I digress…

Regardless, in these tight times it seems more and more acceptable to identify process improvements and start down the path of a “global” improvement without stopping to think how one gets from A to Z without stopping at B, C, D, etc.  You may be wondering, “how does this apply to the title or a ‘thousand-island paradise’ of data?”  Simple – many companies have data sources that are currently working perfectly, as-designed, as-expected (insert your own adverb here to describe facetious perfection) but have little in common with each other.  Projects, especially pricing projects, that are incredibly dependent upon data, must have a global approach in mind. Companies must have a plan to take a “thousand disparate data sources” and harmonize them.

All that’s needed is a process in mind and a plan in place, not the actual data harmonization.  Incredible value can be realized through a small implementation, and as Lao Tzu famously quoted, “the journey of a thousand miles begins beneath one’s feet.”  No value will ever be achieved if you wait for perfect data (honestly, I’ve never even seen perfect data). Expect to start small, achieve great results (regardless of how small the results are they are “great!” – socialize the wins!), and use those results to incentivize other areas of your business to join the project bandwagon. Take those “thousand islands of data paradise” and show each, one at a time, how they can improve for the overall health of your business. The results are there to be had!

In recent years, segment specific price guidance has proven to be a very successful way of introducing pricing optimization processes in the industries where price optimization is relatively new, such as manufacturing and distribution. By product group and customer segment, the sales agents are provided with meaningful reference prices that will allow them to price their deals appropriately and quickly. Especially when the set of products is large and markets are volatile, this approach is very valuable, even for experienced agents.

Would you ever use the same analytic tools to segment your agents? Many companies are leary of associating a pricing tool with the performance measurement of sales agents for good reason: this can be a major stumbling block for the sales adoption of the tool. Nevertheless, in many cases it can really pay to segment your sales agents.

Not all sales agents are equal. There are always a couple of agents that are outstanding, making many more deals than the average sales agent. When walking through a call center, you will see them juggling three or four phones while making very profitable deals. In jeans and coffee stained t-shirts, these agents may not be as glamorous as Wall Street brokers, but their skills are similar and it does not take much data analysis to figure out that these outstanding sales agents can easily earn multiple times of what a pricing consultant makes.  Why are these agents so successful? Is it the type of customers they serve, do they have special contacts? The truth of the matter is that in the vast majority of cases these people are simply very good at what they are doing.

Other sales agents are often trying to learn from these experts, taking some of their time to discuss important deals. Wouldn’t it be great if there was a more efficient way to communicate the information that these experts have? There actually is a way of doing this: by filtering out the deals and proposals of the novices and by giving more weight to the deals of the experienced outperformers, price guidance will quickly show novices and average sales agents what prices and discount experts have been able to ask recently by product group and customer segment.

The value of this approach is tremendous and there is a direct effect because novices will generally avoid some of the major mistakes they would have made otherwise. The secondary effect is that the number of sales agents that succeed – i.e. manages to make enough deals to make it worth their while – increases significantly. The cost of hiring and training new sales agents is significant, and these costs will be reduced in some cases by a factor of two or three. And of course there is the additional benefit of seeing more successful people on the work floor and in the call center. The effect of shared success is priceless.

Guest Blogger – Cecilia Bonfante, Sr. Manager, Accenture

Cecilia is a member of Accenture’s Pricing & Profit Optimization practice.  She has been involved in several systems implementations and has expertise in helping companies realize benefits associated with implementing their pricing strategies and technologies.  In this video she provides an update on what promises to be the largest implementation of pricing software with 10,000 field users for Deal Optimizer and 300 users for Scientific Analytics.