Noteworthy aerospace engineer Burt Rutan once said, “Testing leads to failure, and failure leads to understanding.” His advice is particularly applicable to pricing practitioners who are developing segmentation models.
Once you’ve gone through all the hard work of identifying important customer characteristics and putting together a model, it’s really tempting to start using it right away, no questions asked. After all, you’ve been working on this thing for months, all that hard work must have accomplished something, right?
Unfortunately, it’s all too common for something to go wrong in the segmentation model development process.
You probably started out with all the right intentions, but along the way, as more people became involved in the process, the model may have veered off course. Everyone in your company has a unique perspective and agenda when it comes to pricing. Your job is to make sure that the model you have actually meets pricing’s needs. More specifically, you need to make sure that your segmentation model allows you to adjust pricing so that your company is maximizing its profits.
Fortunately, testing your model is pretty easy. No, you’re not going to need a supercomputer running through a host of mathematical calculations. You just need to ask the right questions and apply a little common sense.
We usually recommend that you start the testing process by asking three key questions:
- Was the segmentation you are currently using specifically and deliberately designed for pricing purposes? If you adopted a model that the product group, marketing, or sales was using, you don’t have a good pricing segmentation model. Simple as that.
- Is your price segmentation designed to highlight where members of the market are actually willing to pay higher or lower prices? You (or your management team) might want to charge different prices for certain groups of customers, but that doesn’t mean those groups will necessarily be willing to pay them. Remember, your model should be based on customer characteristics, not internal opinions or desires.
- Is your price segmentation intended to enable your company to charge different prices under different circumstances? Sometimes pricing teams develop their segmentation models with an eye on reporting rather than focusing on the actual price setting. But to be truly useful, the model should serve as a guide to help sales improve their quotes.
If you answered “no” to any of those questions, guess what? Your pricing segmentation model is a failure.
But the good news is that your failure is setting you up for improved understanding and greater success in the future. It’s time to revisit your model and correct the mistakes you made the first time around. We recommend starting with the webinar The Fundamentals of Price Segmentation. It can help you master the basics so that your next model can pass this first round of testing.
If you answered “yes” to all three of those questions, great! Now you’re ready for more testing. Your next step should be to take the full B2B Price Segmentation Self-Assessment. It can help you identify areas of improvement so that your model gets better over time.
Remember, pricing segmentation isn’t a one-time task. The market is always changing, so you’ll need to revisit your models regularly. Every time you do, you’ll have the opportunity to improve your understanding of your market and better optimize your pricing.
The Fundamentals of Price Segmentation
In this recorded training seminar, we explain the concept of price segmentation and why it's such a powerful and important tool. We explore the essential process and even walk through a step-by-step exercise, building an example price segmentation model from scratch.