In Distribution, Better Segments Lead to Higher Margins
Optimized pricing is one of the best—and often untapped—sources of profit optimization for a distributor. And few strategies can improve pricing in the distribution industry as well as precise, effective application of segmentation principles. In fact, many distributors are adding two to four points of gross margin improvement through optimized pricing. Maybe you are already be aware of this potential for profit gain and have begun to look at more careful segmentation. Perhaps you’ve applied pricing segmentation in a rudimentary fashion, and without a strong understanding of the depth of your options, by grouping customers into simple groups like “small, medium and large,” or looking at customers in terms of their geographies. Regardless of what your current understanding or application of segmentation may be, there’s probably always room for improvement.
In the most basic sense, pricing segmentation strategies help you understand what you can charge similar customers for the similar products, based on factors such as regional pricing disparities, consistency of purchase, anticipated profit margins and more. Segmenting can be a path to tightening up the pricing guidelines set to your sales reps based on data-rich analysis rather than personal relationships or experienced hunches. Areas of segmentation distributors might consider include purchasing power, the size of the client company, the primary industry of the buyer, or your position as primary or secondary vendor.
Stay tuned, because over the next couple weeks, I’ll be posting blogs focused on how better segmentation can help you drive new profits in your organization. If you have specific questions regarding your own strategies, please do not hesitate to schedule a private meeting today.
Graphic credit: Stefano Maggi