Technology has changed the dynamics of pricing strategy. With digitalization, information is now readily available to measure customer performance. Additionally, analyzing price increases is now a data-driven process.
Calculating Outcomes
Consider these elements when calculating pricing outcomes.
Customer segmentation – Make sure your customer segmentation is based on data, not personal emotions. Considerations for segmentation should focus on revenue and gross margin. Pricing shouldn’t be influenced by the emotions of an outside sales rep (OSR), inside sales rep (ISR), store manager, or customer service personnel. Moreover, the top revenue generator for one OSR’s territory may not be one of the company’s top 20 customers. Consider grouping your customers into four categories — A through D — with A being your top performer with the best pricing. Check to make sure your customers are in the correct pricing category based on revenue and gross margin.
Cost of service — Sales revenue and gross profit percentage are not the only considerations. You also need to look at the cost of service. Review how promptly the customer pays their bill. Is the customer that is past due 60 days priced accordingly? How many returns are you processing for the customer each year? Does a specific customer require ongoing training, technical service, or an inordinate amount of other types of interaction? However, these are all costs to your bottom line. They should be quantified and considered in price adjustments.
Customer type and geographic location — Customer type and location affects pricing. Examine how customers use your products and how that affects what you can charge. Use these and other types of considerations in your pricing structure. For example, the greater the distance from a major market, the greater the distribution cost. Pricing should correspond to this. Customers with multiple locations in different markets also need special pricing considerations. Use digital analytics in your pricing evaluation process.
Let Data Drive Pricing Decisions
Lastly, information on customer segmentation, cost of service, and customer type and location all reside in your software systems. Use that data to drive your pricing decisions and create a sales strategy that is responsive to today’s market dynamics.
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