Insights & Tips

Already a subscriber? Login

Become a subscriber and unlock an information arsenal focused on making your pricing efforts more effective.

This Price Segmentation Approach Will Fail

In response to a number of Help Desk questions on the topic, we held a subscriber-only webinar All About Price Optimization. In the session, we cut through the esoterica to clearly illustrate what price optimization really is, what it is not, and how it actually works.

We also let the session run nearly 30 minutes past the allotted time to make sure that everyone’s questions got answered and any lingering points of confusion were addressed. For example, one subscriber asked:

“Can you optimize prices within existing business segments?”

There was a lot to unpack in this seemingly simple question…

With optimization, we’re essentially talking about performing some mathematical calculations. And as long as you can fill in all of the variables in the equations, then of course, those equations can be solved.

So, technically…sure…you can plug complete swags or guesses into any mathematical equation and generate an answer. But the quality and accuracy of that answer will only…and CAN only…be as accurate as the variables you’ve used.

And the most important variable in the price optimization calculus is price elasticity.

In most cases, a company’s existing business segments weren’t developed to reflect differences in price response, price sensitivity, or willingness to pay. Instead, those existing business segments most likely reflect how the company prefers to focus its sales efforts, direct its product development, or even report its performance.

In other words, these existing business segments are not price segments. And as a result, any price elasticity measures you might come up with for these segments are likely to be no better than swags.

Where does this leave us?

  • Yes, you might be able to solve the optimization math problems within your existing business segments.
  • However, the answers you come up with are going to be wrong!
  • So no, you can’t truly optimize prices within existing business segments.

There’s just no getting around the fact that you need a real price segmentation model!

Get Immediate Access To Everything In The PricingBrew Journal

Related Resources

  • Ten Signs Your Pricing Strategy Stinks

    There are so many factors at play in pricing that it can be difficult to know if your strategy is really effective or not. This simple self-assessment can help determine whether the odds are for or against your pricing strategy.

    View This Diagnostic
  • 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.

    View This Webinar
  • Leveraging the Power of Price Segmentation

    In this Expert Interview, Paul Parsons discusses his experiences helping a number of distributors and manufacturers leverage the power of segmentation to boost their margins and profits.

    View This Interview
  • Where Should the Pricing Function Be Located?

    Should Pricing report directly to the CEO? Should it be located in Sales, Marketing, Product, or Finance? While none of these organizational locations is perfect, through our research, we've been able to identify and document some of the common pros and cons associated with each location.

    View This Research