Reduce Price to Improve Revenues and Margins

CHOICE 2:
ISOLATE SEGMENTS RECEIVING THE LOW PRICE

In some cases, the company wishes to offer lower prices on all products to all customers. But this is rare. More frequently, the company wishes to limit the spread of lower prices in the marketplace in order to maintain the higher margins on those customers who would pay the higher prices. The company limits the spread of its lower prices by isolating the lower prices to carefully selected segments, and then by using the four major components of price in order to further restrict the spread of lower prices.

The company segments its market in order to isolate those segments who will receive the lower prices, while requiring the remaining segments in the market to pay the higher prices. This segmentation exercise is different from that in our Improve/Segments section of StrategyStreet. In the Improve/Segments section of StrategyStreet, we segment customers by their unmet needs in order to find opportunities to develop products and services to satisfy those unmet needs. This segmentation of the market focuses on competitive pressures. Competitive pressures, rather than customer needs, drive this segmentation to determine where to offer lower prices. To optimize pricing, the company segments its markets by identifying customer groups where the company finds itself under competitive margin pressures due to falling prices or slipping market share. This segmentation works well with opportunities to reduce prices both defensively and offensively.

The segments emerging from competitive pressures include the following:

A. Product Purchased Segments. The customer segments purchasing a particular product receive the lower price. The vast majority of these product purchasing segments receive lower prices in order to incite their initial or on-going purchases of the company's products. These segments include:

• Product System Component Segment: Illustrative Examples>> This segmentation identifies segments who would respond to a lower price on one of the components of the product system the customer segment uses in addition to the main product. Market conditions where this segment might exist include the following:

  • Customer has special need of the product system component

  • Product system component would ease the customer shift from a previous supplier

  • Customer needs reassurance of product quality

  • Product system component, or its price, is a source of customer frustration with the main product

• Product Cost Savings Segment: Illustrative Examples>> Customer segments who purchase a product that has, or is likely to have, specific savings in its cost receive this lower price. In contrast to the Customer Cost Saving segment discussed below, this segment’s related cost saving comes in the cost structure of the product, rather than in the action of the customer. Market conditions where this segment might exist include the following:

  • Product uses new or different technology

  • Product is offered with less company overhead support

  • The product uses cheaper materials or components

  • Company has excess capacity

• Volume Purchased Segment: Illustrative Examples>> Customer segments who purchase a specified minimum volume, which is more than the average customer, receive this lower price. Market conditions where this segment might exist include the following:

  • Product may be offered in a larger size

  • Product may be offered with another product, including options

  • There is a large variation in the size of purchases by customers

• Loss Leader Segment: Illustrative Examples>> Customers who would be attracted to a low price for this product and then would be likely to purchase other, higher margined, products receive this lower price. In contrast to the Introductory Offer segment discussed below, a Loss Leader product often exists for an extended period of time. Market conditions where this segment might exist include the following:

  • Customer does not know the quality of the product

  • A free or cheap product may attract other paying customers where the company receives revenues from customer referrals

  • The customer's purchase of the product is likely to bring other customer purchases

• Affiliated Member Segment: Illustrative Examples>> These customer segments have a relationship with the company. The low prices are the result of discounts. Customers who are members of a company-related affiliation receive this discount. Market conditions where this segment might exist include the following:

  • Company can create a loyalty program to encourage more purchases by customers

  • The customer sees the price available to a membership group as exceptional

  • Company sells other products that some of its current customers are not buying

  • Some customers would share use of an expensive product in order to reduce the spending on the product ownership

• Introductory Offer Segment: Illustrative Examples>> New customers, or existing customers buying a new product, receive this low price. These low prices are usually due to discounts. In contrast to a Loss Leader discount, the Introductory Offer is temporary. Companies use this segment when the company's product is new to the market or to the customer, but requires limited exposure to the customer to succeed

B. Margin Building Segments. Customer segments who take unusual action to improve company revenues or reduce company costs receive this low price. Companies offer low prices to these segments to reward them for their actions to improve the company's profitability. These segments include:

• Customer Cost Saving Segment: Illustrative Examples>> Customer segments who act to save the company costs receive this low price. In contrast to a Product Cost Saving segment discussed above, this cost saving results from the action of the customer rather than from the cost structure of the product. Market conditions where this segment might exist include the following:

  • Where customer needs less support or resources from the company

  • Where the company has unused capacity

  • Where the company is short of capacity

  • Where customer does some of the company's work normally associated with the product

• Company Revenue Improvement Segment: Illustrative Examples>> Customer segments who act to improve the company's revenues receive this low price. Market conditions where this segment might exist include the following:

  • Customer undertakes some marketing and sales efforts on behalf of the company

  • Customer agrees to increase the proportion of its purchases from the company

  • A marketing partner has access to your potential customers

  • A marketing partner has a product your customer might buy

• Low Demand Period Segment: Illustrative Examples>> Customer segments who purchase during a period of low demand receive this low price. This segment is really a sub-segment of the Customer Cost Savings segment. However, we include it as a separate segment because it occurs so frequently. Market conditions where this segment might exist include the following:

  • The industry is in recession

  • The company is in a seasonal or periodic slow period

  • The company is in product transition

  • Customers are concerned about a declining economy

C. Competitive Supplier Segments. The customer segments who do, or could, purchase from a particular competitor or competitor category (e.g., the Price Leader category) receive the low price. Some of these segments receive low prices to move some or all of their purchases to the company. Other segments receive the low price to shift their buying decision away from Price and toward Function, Reliability or Convenience in the Customer Buying Hierarchy. These segments include:

• Targeted Competitor Segment: Illustrative Examples>> Customers who are, or are likely to be, served by a particular strong or weak competitor, or competitor type, receive this low price. The quality of a competitor’s Value proposition determines its strength or weakness. Market conditions where this segment might exist include the following

  • An industry leader, or high-end competitor, is losing market share

  • An industry leader, or high-end competitor, faces a weak competitor

  • A low-end competitor, or new entrant to the market, sees an industry leader's price umbrella

• Occasion Segment: Illustrative Examples>> Customer segments who are involved in a specific occasion receive this low price. Market conditions where this segment might exist include the following:

  • A special sale period, including auctions

  • Pricing to the timing of customers' funding, paychecks or other special events

  • An impulse purchase opportunity

• Individual Customer Segment: Illustrative Examples>> Existing customers who are able to negotiate aggressively receive individual prices. Market conditions where this segment might exist include the following:

  • The industry is in a price war

  • The company sees the customer only as a source of marginal sales and profits

  • An Intermediary customer of the company faces price competition in its end-user market

  • Many new products vie for limited retail shelf space

  • Customer insists on a lower price because of the customer's research on price or due to its special leverage

• Public Relations Segment: Illustrative Examples>> Customer segments in need of special treatment receive this low price. These segments require a period of lower prices to reduce the likelihood they will reduce their purchases from the company due to a perception of company failure. Market conditions where this segment might exist include the following:

  • Customers suffer from sticker shock from the company's recent substantial price increase

  • Company wants to help a particular group of customers

  • Company wants to increase the good will it enjoys with prior or current customers

  • Public action against the company may be imminent

  • Company wants to compensate customer for a failure

• Performance Perception Segment: Illustrative Examples>> Customers who purchase despite the broader market’s belief that the company's product performance is below that of its competition receive this low price. Market conditions where this segment might exist include the following:

  • The company's product is a new entrant to the market and requires longer exposure to the customer to succeed

  • The company's product is going out of style

  • The company's product value is below standard for the category

  • The company's product has a limited shelf life

• Location Segment. Illustrative Examples>> The customer segments who purchase in a particular location receive the lower price, usually in the form of a discount. Discounts to these segments either attract more customer purchases or discourage competitive discounts.

  • Locations where the company is strong due to a high market share:

    • Where the customer is concerned about falling prices in the area

    • Where competitive pressure is higher than the average location

    • Where demand is lower than average

  • Locations where company is weak due to a low or falling share:

    • Where company believes competition will not be willing to match its lower price

    • Where company is under attack by a low-priced competitor

    • Where the company faces demands from a large strong customer in a particular region

    • Where demand is lower than average

• Relationship Renewal Segment: Illustrative Examples>> Customer segments who renew their relationships with the company receive this lower price. Market conditions where this segment might exist include the following:

  • Where the customer seems unlikely to renew the relationship

  • Where the company wishes to provide an incentive to the customer to lengthen the term of the relationship

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