Want to Raise Prices? Customer Segmentation Provides an Answer
Through a special arrangement, presented here for discussion is a summary of a current article from the M Squared Group blog.
In a recent article in The Wall Street Journal, How Companies Can Get Smart About Raising Prices, Professors Paul Farris and Kusum Ailawadi suggest that companies will be forced to raise prices in coming years, since cost of goods and transportation have been rising steadily while prices have remained flat to declining. While cost savings have been beneficial, they’re running out.
With many customers still price-sensitive from the past recession, some companies have tried to "hide" their price increases through a number of strategies: cutting promotions, reducing quality, package sizes, etc. But all of those strategies have been shown to backfire, since consumers have a sense of what is a "good value," and are sensitive to "price gaming" — when a few consumers figure out "the trick," they let everyone know. Then the company has to deal with a negative reputation to go with the pricing issue.
So how can you raise prices right?
Professors Farris and Ailawadi recommend using customer segmentation to target promotions to the right customers.
(Full disclosure: I studied under Prof. Farris at the Darden School of Business at the University of Virginia and we have kept in contact over the years.)
As they write, "After raising prices, companies should rely on discounting to keep their coupon-clipping customers — the ones most likely to jump ship if they think they’re getting a bad deal. That means taking a close look at who their customers are and who should get what promotions."
You don’t have to tailor promotions on a 1:1 basis. "It’s enough to group customers into segments based on things like their purchase history and how sensitive they are to price."
Many retailers segment by using some combination of the following three approaches:
- Analyze historical promotional response at the segment level to find out which segments actually respond to a promotion at all as well as which segment’s purchases are actually incremental, rather than simply replacing existing purchases with a greater discount. If you do not have control groups in your data, examine customers using the promotion versus customers that are making purchases without the promotional redemption.
- Test and control your way into knowledge. Take a subset of your customer database by segment, break that into a test and control group and run an e-mail marketing campaign. Levels of promotion can be tested versus each other and the control group all by building a test matrix.
- Analyze past pricing actions at the segment level. Identify markets where pricing has changed and evaluate customer purchase patterns before and after the announcement of that change.
By varying promotions and discounts, the most valuable, most price-sensitive customer segments can be somewhat protected from the impact of these price actions. The strategy of segment-specific marketing programs also benefits the retailer or manufacturer because it communicates to consumers that they are known and cared for by the organization.
- Want to Raise Prices? Customer Segmentation Provides an Answer – Cultivating Your Customers
- How Companies Can Get Smart About Raising Prices – The Wall Street Journal (sub. required)
- Customer Segmentation: Using Behaviors to drive Data-driven Marketing – M Squared Group
What do you think of the merits of using customer segmentation to base pricing strategy? What are the potential challenges and/or risks?