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Price Segmentation: An Underestimated Tool For Improving Pricing Strategy

Vendavo< Vendavo January 25, 2022

As anyone knows, the price of a product or service is rarely set in stone. You only need to look at the pricing of airfares, as just one outstanding example, to see how much the cost of something can vary – despite the product itself not changing at all. 

Pundits have tried to analyze pricing as far back (at least!) as Pliny the Elder in Roman times. Even then, it was clear that pricing was mainly dictated by the perceived value of the product being priced.

While companies will choose the pricing of the goods they’re looking to sell, it’s ultimately the customers who have the final say in what a product is really worth to them. In other words, what you’re selling is only worth as much as a customer is willing to pay for it.

For B2B brands, pricing differentiation may be more commonplace. End prices are often negotiated and changed based on a multitude of factors (industry, location, etc) – but this doesn’t make it any easier for pricing teams to maximize opportunities. Setting prices based on an estimated willingness to pay can’t be effective when each different customer has a different perception of value across all the products they buy. 

Enter price segmentation.

What Is Price Segmentation?

Simply put, price segmentation is a whereby prices are differentiated based on willingness to pay. It is driven by the fact that price sensitivity can vary so much from customer to customer, from product to product, and in all the locations that they use your product.. 

For example, a building materials distributor sells timber to a wood shelving manufacturer. In this case, the timber makes up a large proportion of the manufacturer’s cost of goods – leading to higher price sensitivity. The same distributor may also sell to a construction company where the timber makes up a lower portion of the cost of goods, typically resulting in lower price sensitivity. 

The perceived value of a product will also be influenced by other factors, too, such as timing and market conditions in the given geographic area. B2B sales teams may be more attuned to these dynamic conditions and can use their intuition and experience to maximize results. The challenge arises, however, when sales teams over-rely on this gut feeling to win deals that boost their sales rate more than the bottom line. 

Introducing price segmentation should thus be done in a way that complements existing processes, working to fine-tune the sales team’s gut feelings rather than work against them. Technology is the way forward for this. Data-driven price optimizer software gives teams the edge with much more precise predictions for price setting for each segment. Leveraging this alongside the on-the-ground experience of a sales team allows companies to extract much more value from each deal.

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Price Segmentation in Practice

In practice, the best strategy is one that combines the power of pricing optimization technology with sound business judgment. Leveraging historic data helps with identifying segments based on past behaviors or attributes. The most commonly seen include…

  • Product/service – What is being sold
  • Volume – How much is being sold. Typical deals tend to involve a customer purchasing a certain number of items to access a specified discount or a reward. This is widely used by subscription services looking to lock in customers for longer. 
  • Time of purchase – When is it being sold. The price of a product can change significantly, depending on when that product was purchased. 
  • Channel of purchase – Where is it being bought from. There may be discrepancies in the perceived value of a product when viewed online, versus in real life.
  • Customer – Who is it being sold to. Pricing can vary according to the customer making a purchase and the ultimate end-use of the product. This customer price can even vary by region of use, or ship-to location. 

Once it’s been established which attributes already exist within historic sales data, it’s useful to infuse with human insight to gather more nuanced views on customer behavior. This way, companies can avoid the trap of over-segmentation (where too much granularity muddies the waters) or too little segmentation where prices are set too broadly as a result. 

Implementing Price Segmentation 

Price segmentation can be simple enough to implement, it’s just a case of understanding pricing mechanisms, and knowing how to segment the market you’re looking to sell to. The big point to understand is that price segmentation requires company-wide understanding. Guidance should come from the top in regards to establishing and communicating processes to the price-setters and sales teams. 

On paper, here are the main factors influencing pricing segmentation strategies. 

  • Segmenting the market: The first step in achieving effective price segmentation is understanding your prospective buyers. You’ll need to be able to separate potential buyers into groups, based on similarities in their perceived value of your product. With enterprise-level solutions, these customer groups and product families can serve as attributes for more granular segmentation – for prices that are dynamically appropriate for meaningful product-customer intersections to match willingness to pay.  
  • Understanding pricing mechanisms: Pricing mechanisms can be used to help match your products or services with customers, for the price they’re willing to pay. If your pricing is flexible, you’ll be able to entice a greater number of customers through deals and discounts that make your product more accessible to them. Dynamic market conditions require agility in how you use pricing to communicate value to your customers.

Price Segmentation Only Sounds Like a No-Brainer

Price segmentation may sound like a no-brainer, and for many companies it is. But that doesn’t mean that things can’t go wrong. 

If pricing segmentation is implemented without pre-thought, businesses risk sub-optimal results. Price dilution and stagnation can occur when price segmentation strategies aren’t fully understood or regularly reviewed. 

Guidance should come from the top in regards to establishing and communicating processes to the price-setters and sales teams. 

Thankfully, companies now have a wealth of information available to help inform their price segments. The key is understanding that this isn’t a one-size-fits-all process. 

Companies need to find the right granularity, and that’s why data is so vital for providing unbiased context for pricing strategies. Without historical transaction data and analytics, businesses will inevitably fall back on guesswork to determine their pricing. Finding nuance to create highly accurate segments then relies on blending human expertise with enormously detailed data sets, allowing businesses to reap the rewards of a finely-tuned pricing strategy

It’s a challenge a modern B2B enterprise can only address by using advanced technology. At Vendavo, our AI-embedded pricing solutions are designed to maximize sales potential, by optimizing pricing and sales to achieve reliable and enormously profitable outcomes. Request a demo to find out more