If you’re a distributor, you might pride yourself on how well you know your customers. You know their needs, order schedule, and may even know them on a personal level.
Are you making the most of your customer knowledge and pricing history? Do you let the pricing data shine through or do you make pricing decisions based on personal experience with specific customers?
As pricing grows more competitive and margins shrink, more distributors are taking a closer look at their customers as a way back to better profits. Believe it or not, the data you already have from your customers is likely enough to introduce customer segmentation, which leads to new profit opportunities. The question is, how do you use segmentation to set prices that work for you and your customers without spreadsheets?
How Customer Segmentation SHOULD Work for Distributors
Starting with the basics, customer segmentation is simply the process of dividing your customers up into groups based on common characteristics.
Primary examples of customer segmentation facets include:
- Buying power
- Profitability
- Cost to serve
- Industry
- Location
- Any other quantitative attribute
For distributors, some level of segmentation has always been a major contributor to margin maintenance, but in our current economic climate, there’s no longer any room for error. A distributor with flawless segmentation is able to keep profit margins protected, adapting prices to segments as needed, while better maintaining customer relationships by minimizing unpredictability in prices. Distributors that don’t spend energy perfecting segment-based pricing are much more vulnerable to the issues associated with imperfect pricing, including too-low prices cutting into margins and losing business to better optimized competitors.
Segmenting Your Customer Using Your Data
Through segmentation, many distributors discover that grade-D clients are receiving grade-A prices.
Over the past five years, customer segmentation practices have become much more advanced, but distributors have only recently started reaping the benefits. Segmentation with your customer data can now simply reveal the grade of all of your customers. The result: many distributors are discovering that grade-D clients are receiving grade-A prices and vice versa, a situation that can be completely avoided with better segmentation. No matter how you slice it, poor segmentation is a drain on profits.
By segmenting and revealing the data-based grades of your customers, high cost-to-serve customers can be identified in seconds and assigned the correct grade in minutes. This also makes pricing decisions a proverbial snap, as margins can and should be established based on segments.
A Bird’s Eye View of a Segmentation Roll-Out
The best way to introduce segmentation and all its benefits to your organization is by first introducing a Customer Relationship Manager (CRM) if you haven’t already. Just getting your customer data into a CRM is a huge step, as it gives you visibility into all your customer information in one place.
Next, after your CRM is set up and customer grades are revealed, you’ll need to establish set margins for each segment based on the data, then stick with them. Deviating from data-based pricing will only put your profits or customer relationships at risk.
Pricing Pro Tip: Keep a close eye on cost changes, as rising costs will need to be factored into your segments. The good news is that updating prices across segments takes much less time than doing it one customer at a time, especially when you aren’t using spreadsheets.
So to recap:
- Use a CRM to score and track your customers
- Establish set margins for each customer segment based on your data, and stick to them
- Keep a close eye on cost changes
It’s that simple.
Dealing with the Difficulties
Segmentation solves a lot of pricing problems for distributors, but it can be difficult to maintain without a dedicated solution. Fortunately for distributors, dedicated pricing and segmentation solutions usually pay for themselves incredibly quickly. epaCUBE’s suite of price optimization solutions and services includes everything you need to segment your customers, assign grades, and price your goods accordingly. epaCUBE is built BY distributors FOR distributors to deliver the tools needed to protect margins and gain competitive advantages.
If you’re interested in learning more about segmentation and price optimization:
- Register to download our free 2024 Distributors’ Guide to Pricing Optimization
- Next Blog: Profit Optimization is the Big Change Distributors Need in 2023
- More Reading: How Distributors Can Keep Up with Cost Changes