We recently conducted a webinar in conjunction with the Professional Pricing Society where we discussed the 8 Myths of Pricing Optimization.  The webinar was so popular and highly rated that we decided to expand upon it in eight blog posts over the coming weeks.  Enjoy!

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I have talked to hundreds of companies in my nearly ten years in the pricing space.  Invariably, when the subject of pricing segmentation comes up, they say, “we already segment our customers.” They discuss how for years they treated all customers the same. Now they can classify customers based on spend, sales geography and possibly total available market. Salespeople are happier, and these companies are seeing a downtick in discounting. They call this segmentation.

The challenge today is that almost all companies have the ability to classify customers in this way. It is no longer a competitive advantage, and, more often, executing on this segmentation remains  dependent upon the data held in your data warehouse rather than the real knowledge of your customers and how they buy. Without a customer-centric segmentation, millions of potential profit dollars are left on the table.

Here are three tips to create a real pricing segmentation:

Solution #1:  Pricing segmentation requires that companies take an outside in – not inside out – approach to their markets. For example, why would you constrain your segmentation based on how you classify your sales regions? Best-in-class pricing segmentation uses direct attributes like sales spend, but it also takes into account derived attributes like the intensity of the competitive environment and product-centricity or which products command the most customer sensitivity. Remove yourself from internal constraints – what data you have and how you can classify customers – and start looking at your company through your customers’ eyes.

Solution #2:  You have the data to develop a good segmentation. Most companies review only customer, product and sales dimensions, without leveraging transaction data. What do I mean?  Customers vote with their pocketbooks. A customer can tell you what they value by the products they buy.  Does your customer purchase your premium or your discount product lines? How often do they purchase? When they purchase, do they need it tomorrow or next week? By analyzing customer-buying patterns and how they buy from you, you’ll be able to drill down and get to the core of true value-based pricing. Segment based on what your customers buy, not how your systems identify them.

Solution #3:  Lots of attributes can be used to classify customers.  But classifying customers really isn’t   a segmentation since it doesn’t give you a determination with attributes about which customers are the most statistically significant. While both customer-spend and location may affect their willingness to pay, what’s more important? Classifying customers is the not the same as segmenting them based on statistical analysis. Use this analysis to determine not only what is important to customers, but also exactly how important it is.

We have more than 100 possible attributes that drive customer-purchasing behavior and pricing sensitivity, and we have hundreds of customers go through this pricing-segmentation process with us.

One of the most interesting attributes we ever encountered came through our work with an animal health products distributor, where  one of the segmentation attributes was species. Care to venture a guess as to which owners will pay more for exactly the same medicine:  cat or dog owners?  Contact us to find out.

Thanks.

Patrick Schneidau

Yesterday, Google announced a rare miss to earnings:  Year-over-year, revenue grew ONLY 25% and profit a mere 7%.  Analysts cited pricing as one of the key reasons for the miss, as the average pay-per-click price decreased by 8% despite growing volume 34% from a year earlier. Does Google have a pricing problem?

If you look beyond analyst reports, the answer is not so simple. The trend in web advertising has shifted in the last year, with individuals clicking on ads from their mobile devices rather than their desktop computers.  Of note, mobile devices inherently drive lower price points than desktop clicks. Despite the lower average price, the growth in volume could not offset the decrease in revenue. This is a MIX challenge, not a pricing issue. 

Google may still command a premium price for both its desktop and mobile pay-per-clicks relative to alternatives. However, due to structural changes in how people use the web, the mix of price points is causing a revenue challenge. The larger question for Google is twofold:

1)      Are they able to maintain or grow their pricing power in each segment?

2)      Are they able to maintain or grow their market share in each segment?

If the answer to these two questions is yes, then it certainly is a mix issue and not a pricing issue. 

If you were in charge of pricing at Google, what actions would you take?