Market Segments
First, some assumptions for this adventure:
- You have been in business more than three years
- You are a distributor of goods produced by others
- Times are tough and you are losing money
Another day I shall attack just how stupid that statement is, but for now, I agree. No one else on planet earth is like your business. No one else has your people. Nor your exact ideas. Or your equipment. I get it.
Review my assumptions (above)... if you can respond that these three simple statements are true for you today, then you may continue reading this post. Or, if you compete with businesses that would confirm that those three little statements describe their business, you may want to continue to read my thoughts on Pricing when addressing market segmentation. Maybe not. You decide. If you tell me that you are not sure about your competition, then I must ask you to delete my materials from your computer memory banks... and suggest that you quickly enroll in a college or university and take a Business 101 course. ASAP. But I digress...
Of course I could have made this example about companies in the retail space. Or manufacturing. These concepts will for the most part, transcend industries. Or so it has been my experience.
Second, a simple (but not easy) requirement
You have read Part 1 and Part 2 on Pricing and can shake your head in the affirmative that you are in agreement with those posts, and my conclusions. Which is another way of confirming that you have identified the constraint in your business.
Or, you have a guess at the constraint for which you are quite proud. The great thing about Constraints Management Model (CMM) is that if you guess wrong, so what? The systematic approach will quickly identify your error, and direct you to the correct core constraint in record time. In days. In other words, not sure? Guess!
But get moving!
Now, for those still reading, let us dive into market segment pricing. Grab the following list of items. Right now. Do not pass "go" ...
- Last year's P&L Statement (if your fiscal year closed in the last 90 days, grab the previous year's P&L)
- Last month's P&L Statement
- Current Customer List; ranked by Year-to-date Sales
Throughput = Total Sales - Totally Variable Costs
For example, consider this chart:
Here, we see that for distributing two products, "P" and "Q", on net sales of $12,000 we generated only $6300 of throughput. In other words, the mix of these two items contributed $6300 to cover the expense of doing business. Expenses like rent, salaries, utilities, etc.
In this example, we actually sold 100 units of "P" and 30 units of "Q" and made $300 profit. Therefore you now know that "P" sold for $90 per unit and "Q" for $100 per unit.
The $64 Question: How to make more money?
What if you learned that your competition had quoted "P" at $110 and "Q" at $130 per unit? How might you use that information? Let us assume that your constraint is the terms from the vendor in your supply chain that provides you with "Q". The vendor of "P" is constantly calling and asking if you can sell more units. And her terms are 2 10 Net 30.
Chaos would best describe the financial market today. Vendor "Q" wants paid in advance. No, not COD, but actually wants paid in advance in order to actually schedule your product for build. I was in that situation at least once. Unless they had my check in hand, they would not schedule production of a key component. Takes scheduling your production line to a whole new level!
Remember that no one wins a price war
So, given the relatively few details in this example, one approach might be to contact the competitor that was offering "P" at $110 and suggest that you have excess capacity and the ability to deliver "P" to them for $50 per unit.
Why?
Look at your costs! Each unit of "P" costs you $45. What are the chances that your existing customer base would refuse to take your product if you made this deal? Zero. Why would they? How would they know? And if the competitor did tell, so what. There are a host of reasons why this segmentation of the market would be to your advantage. And to your competitor.
Take a minute and think through a couple of examples.
This post is getting much longer than expected. In closing, let me point you to the airline industry. Or the hotel business. They call it the "pool side chat." Yes, there is actually a term for the activity of guests asking each other, "How much did you pay for your room?"
Airline passengers too (How much was your ticket?)
These are two industries to study to get a much better grasp on Pricing models.
By the way, if you are in the hotel business, using RevPAR as a decision-making metric will probably put you out of business. But I digress...
Think this post over.
Let me know your reaction.
More to come on Pricing!
Jeff 'SKI' Kinsey, Jonah
Throughput.us LLC
ski@throughput.us
(330) 432-3533
©2008 Throughput.us LLC. All rights reserved.
