February 11, 2011
With rising commodity prices and increased wholesale inflation pressures, executives face the daily challenge of finding innovative ways to maintain profits. The traditional methods of cost cutting and downsizing have been exhausted, and executives are re-focusing on growth initiatives.
Customer segmentation and value maps might prove to be the dynamic duo executives need to battle their toughest economic opponents. Segmentation allows executives to break up customers into groups based on a set of demographics. A value map is a pricing analytics tool that displays a particular “product’s position against competitors’ offering in that segment.” It provides a snapshot of “how customers view the tradeoffs between the perceived price and perceived benefits of available products” (The Pricing Advantage).
An example of this is how PC companies were able to boost their profits by raising prices. PC companies discovered they could perform better price execution by segmenting customers based on desired features and performance capabilities. Furthermore, by mapping out these customers segments perceived value of certain products’ features and performance capabilities, they could offer the right bundle of benefits to foster a higher willingness to pay from certain customer segments.
During the course of evaluating customer segments and their perceived value of various products, it is common for executives to want to improve the least profitable customer segments first. Conversely, a recent MIT Sloan Management Review article highlights it is more important to prioritize existing, already highly profitable customers. Focusing resources on an already strong customer base allows executives to rework the current value map to create innovative benefits custom fit for this group. By giving the profitable group more of what it wants, executives can justify their prices to match perceived benefits.
This is not to say you need to ignore the customer groups that aren’t as profitable. However, providing a homogenous set of benefits to every group is ineffective. Homogeneous benefits result in the more profitable segments not being catered to effectively and the less profitable segments receiving more benefits than needed. Smart value mapping dictates there needs to be variation in the benefits each group receives. The most profitable companies’ pricing strategy focuses on varying their product service bundle for different customer categories to ensure the right price for each segment.
– Colin Carroll