With a global recession dominating the headlines, the value of many commodities falling, and consumer price increases in the United States at razor-thin levels, many manufacturers these days are just hoping to hold the line on the prices they can charge for their products. For many, pulling off an across-the-board increase is almost out of the question.
“With the recession, there’s been a tremendous amount of negative pricing pressure for our various product lines,” says Tom Cull, strategic pricing manager at Hubbell Lighting Inc., a maker of residential and commercial lighting.
Now Hubbell and many manufacturers like it are responding to those downward pricing pressures by attempting to get smarter about how they go about setting, adjusting, and enforcing prices. For many just starting down the path of pricing management and optimization, an important first step is customer base segmentation, a structured look at key customer characteristics that influence how much buyers would be willing to spend for a product.
“Historically, most manufacturers haven’t applied any kind of science to how they price their products,” says James Robbins, senior executive and leader of Accenture’s North American automotive and industrial equipment practice. “Most follow very loosely controlled sales processes. For the most part, they haven’t considered things like segmentation.”
Manufacturing clients applying segmentation and other price management techniques have been able to raise their return-on-sales margins by 4% to 5%, Robbins says.
As a foundation of price management, customer segmentation is a relatively simple concept. Based on its business strategy and other priorities, a company may, for example, decide to identify customers that are likely to pay more than other customers for a given product or set of products. The company then identifies characteristics that define that customer set or segment. Then, sifting through historical data usually pulled from order or customer management systems, a company can identify specific customers that fit into the identified segment and institute pricing policies appropriate to that customer segment.
Large retailers and financial services companies have done this kind of thing for years, segmenting customers to make more scientific decisions about where and how to market and price their products. For the most part, however, manufacturers have not.
“Price management has been one of the most underdeveloped parts of industrial management,” says Charlie Peters, a senior executive vice president at Emerson Electric, who, six years ago, was put in charge of companywide price management at the $24.8 billion global manufacturer.
So why have manufacturers tended not to engage much in price management and techniques such as customer segmentation? Culture and technology, according to experts.
Most manufacturers in search of significant process improvement tend to look first to the plant floor, where variables are more easily measured and controlled. External, customer-facing processes are perceived as less controllable, so they tend to get overlooked by many manufacturers, experts say.