Develop a Better Pricing Strategy with Effective Customer Targeting
Your company's pricing strategy will not work if the company tries to sell to the wrong customers, so customer targeting is essential. Amazingly, I have seen it estimated that the wrong person makes more than 80% of the sales calls in the United States. Nearly every sales executive I've asked about this has been comfortable with the estimate. There is some level of mismatch between the sales efforts of most companies and the actual marketplaces they serve.
There are actually two sources for this mismatch. First, companies are often ill-informed about who the "best" customer is. Best customers are easily defined if the company has a process to do so: they are those who recognize your unique differentiators and are willing to pay a premium price for them. Using willingness-to-pay research, they are not all that difficult to identify. But companies rarely expend the funds, time, talent, and energy required to identify them and instead don't target at all or target the wrong customer segment. They create marketing and sales messages and processes adapted explicitly to these most desirable customers even less often. This leads to the second source...
The second source of the mismatch is ill-managed marketing and sales effort. Even when the company has a good idea of whom to pursue, it fails to target its marketing and sales efforts to these ideal customers, again because they don't know how these messages match up with different customer profiles or segments and don't know what marketing channels and messages support higher sales volume at higher prices. One company I spoke with a week before this writing had a target definition ("IT managers with midsized companies") but expressed frustration that so few of their customers fell within it. The management had a target, but the marketing, sales force, and pricing strategies were not aligned, so salespeople were "on their own" to pursue opportunities as they came their way. The company compensated for the mismatch by offering high discounts. The company had a customer targeting policy but neither supported nor followed it. In effect, they were trying to sell to "everybody."
One consequence of the attempt to sell to the wrong people is its downward pressure on price. As companies attempt to close buyers not squarely within their target market, the unavoidable reaction is to lower the price (or raise the discount) to make the offering more attractive. As companies make this a habit, they begin a fruitless search for the price that will make customers buy.
This sad state of affairs results from numerous failures across the entire management team. The balance of this article will set the framework for a more productive approach.
It starts with the market definition: how well does the company understand who buys its products and services? Does the company know what these buyers are willing to pay? Does the company even have a productive terminology for understanding its marketplace?
The Iron Law of Pricing says, "Different buyers will value your products and services differently and at different times." For example, think about this in the context of data security software. An IT manager may be tasked with implementing the software and would care much about how simple it is to install and configure. They will also be concerned about the quality and accessibility of the vendor's customer support, but the purchase is unlikely to come from the IT manager's budget. Thus they care little about the actual price.
On the other hand, the CIO would care much about how much safer the company's IT infrastructure would become, the reputation of the vendor, and how much the vendor can be trusted, as a wrong decision may be a career-ending move. (Recall the saying, "nobody gets fired for buying IBM?) If there have been recent security breaches in the company or well-published security breaches, the urgency to use state-of-the-art security software increases, and so does willingness-to-pay. This leads to a situation where the CIO has the budget and can purchase the software, but any good manager will take advice from the IT group. The IT manager, with no budget for the software, therefore, can stop the purchase (can say "no") but cannot initiate the purchase (cannot say "yes"). Thus, the vendor needs different value messages and promotes different features for the different groups in the company. Further, the vendor needs to know the messages and benefits that drive the highest willingness to pay for each segment and needs a pricing strategy that will leverage the knowledge of willingness to pay to generate a stratified pricing strategy that minimizes sales friction and leads to the highest possible revenue.
Segments are subsets of the marketplace that respond to similar value drivers. In B2C sales, simple attributes that describe a market and its segments, such as gender, income, educational level, age, location, etc., are often sufficient. They should also be enhanced with relevant interest areas, activities, and use cases. In B2B sales, understanding customer segmentation from interviews with salespeople and ad-hoc meetings between execs from the vendor and buyer in B2B sales is better than doing nothing. These segments are often based on company size, industry, or location. This is not enough and also must include the buyer's title, the buying process, the use case, the budgets, the budgeting process, the growth rate—and even the aspirations of the company and its competitive environment.
From willingness-to-pay research, you will know that different segments will be willing to pay different amounts for the product or services. This needs to be with different messages, bundles, and content and set prices that accurately reflect the value different segments place on your offerings in the prices you charge for those segments.
Bottom Line: Without careful market definition and management discipline, you will see ongoing downward pricing pressure from your sales force and increasing pressure on margins as the customer demands for discounts continue to grow. Careful customer targeting of marketing and sales efforts will pay unexpected dividends in terms of higher margins, higher profits, and even higher sales volumes.
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