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Distributors live in a complex world, managing tens of thousands of products and customers, and often millions of transactions each year, with each one of these transactions producing a tremendous volume of customer data.

Dealing with this data can be overwhelming and often confusing. Knowing how to use it to your advantage is the best way to eliminate margin erosion and level the playing field. Customers are buying smarter and even using procurement software to cherry pick and drive purchasing decisions, so the 'old-fashioned' method of fighting these challenges with price lists, e-mails and spreadsheets will not hold up during negotiations.

The question now becomes, where to start?

Too many companies rely on gross aggregations of customers, viewing them through simply defined segments such as buyer size or product type. These one-dimensional views are archaic and cannot capture important attributes, like how quickly a customer needs a particular product or the customer's perceived value-in-use of the product. It's time to take advantage of the data at hand through a new view of customers called Pricing Segments.

Pricing Segments are a set of transaction attributes, relating to the customer, product or order, that exhibit a different and exploitable response to price. This allows distributors to group customers based on multi-dimensional attributes that ultimately lead to price based on value rather than aggregated, blended cost plus multipliers. Pricing Segments can also offer insight into what the 'plus' is by modeling how customers will respond to certain price offers.

Viewing customers through Pricing Segments represents a shift in thinking for distributors, but the process has proven successful. For example, a technology distributor until recently divided its customers into eight simple segments. After careful analysis and modeling, more than 6,000 individual and unique Pricing Segments were identified. The analysis revealed that customers' elasticity to price varied greatly depending on the environment. For example, they discovered that the same accessory may have a different mark-up value depending on whether it was sold with a desktop computer or a notebook.

Pricing Segments also showed how the client's customers react differently to price when manufacturer rebates were present, or they knew about the available discounts. Understanding customer reaction to rebate offers became a critical factor in determining price for this particular distributor.

So how do you best manage thousands of unique customer segments? The answer is simple. Your customers have sophisticated procurement software, so why don't you have sophisticated price management software? Manual or homegrown systems, or even the 'mother of all spreadsheets,' can manage six to 10 fairly simple customer segments, but they are not equipped to handle complex Pricing Segments. Pricing software takes existing customer data, which you currently own, and analyzes it on a daily, weekly and even hourly basis to ensure success. The software can also be leveraged to ensure compliance and enforcement of prices once they are set.

Distributors who don't extensively track and analyze sales and quote data are operating in a pricing vacuum. Understanding customers and segmenting them properly allows you to focus on the right price for the right customer and put dollars back where they belong—the bottom line.