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Price Optimize for Your Best Customers

The scenario: Customers who account for a small
percentage of sales are taking up a large percentage of time and energy —
at a time when a resource-strapped company can’t afford to spread
itself thin.

The tactic: Segment your core customers from the deal
seekers — and offer goods that will appeal to each.

Every business depends on different types of customers whose
importance can change in step with a changing economy. According to
Pennsylvania State University management science professor Gary Lilien, most
businesses depend on three basic groups of customers: “value buyers,”
who will pay extra for service and support; “price buyers,”
who just want the bare-bones product at a low price; and “pigs,”
those who want all the services and the lowest price. During a
recession, Lilien says, most companies can’t afford the pigs, so now
is the time to move them into one of the other two categories.

Any company with a wide range of customers can look for ways
to package its goods and services differently to meet different needs. Successful
customer segmentation relies on research gathered by sales reps or through
loyalty programs, surveys, and behavior tracking on the Web. With the right
data, companies can pinpoint exactly who their customers are, what they need,
and how much they’re willing to pay for it, and then develop pricing
models accordingly.

In 2002, customer research helped chemical giant Dow Corning segment its core clients from its less profitable ones — and still
optimize prices for each. Data showed that as the markets for Dow Corning’s
silicon products matured, the company lost buyers who no longer needed its more
expensive services, like product testing. So the company responded by developing
Xiameter, a separate business unit that offers discounts for bulk orders of its
biggest selling silicon products. Xiameter customers must make purchases
electronically; almost all of the unit’s transactions are done by
machine, which keeps costs low. Customers who need technical support or who
only buy small volumes still place their orders with Dow Corning —
and pay the full-service price. By offering a two-tiered pricing system for the
same products, the company was able to maintain its traditional high-touch
relationships while holding onto those customers who were leaving to find
better bargains. Those who didn’t like the new program were free to
go elsewhere; Dow Corning could afford to lose them since Xiameter experienced
double-digit growth in its first year of operation and paid for itself within
three months.

Caution: As Harvard Business reporter Loren Gary has
pointed out, a two-tiered pricing system could
undermine core business
if premium customers think they’re
being overcharged, so companies need to make sure their service offerings are
worth the price they’re asking.

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