Pricing Segmentation at the Heart of Pricing Strategy
Not all prices are created equal. That may sound like a strange statement but stay with me on this one. As manufacturers and distributors think about setting prices for products and services in B2B industries there are a huge number of factors that will determine what price a buyer is willing to pay. Specifically, what is the optimal price point that allows you to close the sale while capturing the most margin?
Consider a specialized bearing. This item may be used in a variety of applications from aerospace landing gear to production machinery to oil and gas equipment. Each application has its own unique needs and issues that the bearing will address.
Beyond the application requirements lies a host of other factors that may enter the price equation, such as:
- Speed of delivery
- Technical service requirements
- Size of the customer
- Buyer skill set
- Payment terms
In order to arrive at an optimized price each of these factors, and perhaps others, need to be considered in the price decision.
As we consider various factors we can easily see that a “one size fits all” price will not apply. In fact, it is likely that any single SKU may have multiple prices for any given situation. We have seen businesses with thousands of price points for just a few hundred SKUs.
Complex? Yes, but the user interface can be simplified for the field sales team and the company is able to capture more sales and higher margin by having customized prices for a variety of pricing segments.
The key is to identify the critical pricing segments that will drive price differentiation based on buyer differentiation. A simple starting point is to look at your product offering and segment product families into “buckets” from commodity products to high value products and price accordingly. Other price drivers like markets and customer price sensitivity can be added later.