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Editor’s note: Your customers are telling a story. Are you listening? Segment profitability management offers a powerful lens to decipher the hidden insights within your customer data. In this blog, discover how segmentation profitability can identify your most valuable segments, optimize marketing efforts, and make data-driven decisions for sustainable growth.
All people may be created equal, but the same can’t be said for customers. The reason for this is that companies are aware that certain customers generate more profit than others. However, they frequently provide the same pricing and services to less profitable customers as they do to their most valuable ones. This approach overlooks the fact that these less profitable customers do not contribute positively to the company's bottom line.
Why?
Because in most cases, companies simply do not know who these unprofitable customers are. Hence, they fail to develop effective strategies or manage costs accordingly.
To counter this, the common strategy which companies adopt to soften the blow is by trying to boost profits by either selling more products or raising prices, while others work on cutting costs. However, they soon realized that just taking steps out of the blue is not the solution. And hence, a growing number of businesses are discovering that analysing the profitability of their products and services for each customer or product line can lead to better profits. But how do you do this?
Enters segment profitability management a process helping companies make informed changes to improve their profitability.
Segment profitability describes the profit generated from different segments of the business and defines the factors responsible. In simple terms, integrating segment profitability is essentially about identifying which customer segments or product categories contribute most to your bottom line. It is a useful method to evaluate the attractiveness and success of specific audiences a marketer targets.
Let’s look at it in this way - Imagine a mixed fruit juice. The juice consists of various fruits and water, each contributing differently to the overall flavor and health benefits. By analyzing the composition—such as the amount of each fruit used, their nutritional value, and customer preferences—you can determine which ingredients yield the best taste and health benefits. Similarly, in profit segmentation, businesses can dissect customer data to identify which segments are most appealing and profitable.
By understanding the importance of segment profitability, business can:
Given the importance of segmentation analysis, the companies usually see it through two primary lenses:
Profit segmentation by product is all about figuring out which items are selling the most and providing the best margins along with how they stack up in terms of profit margins. This analysis helps businesses spot their star products and find potential in those that aren’t selling as well.
Consider Apple Inc., which meticulously analyses its product line. The iPhone consistently ranks as their best-selling product, but Apple also invests in marketing strategies for accessories like AirPods and Apple Watches, which have higher profit margins. In 2023, Apple reported that wearables generated over $40 billion in sales which represents 10% of their total sales revenue.
This makes a strong case of how understanding product profitability can drive strategic decisions.
Profit segmentation by customer involves diving into different customer groups to understand their buying habits and motivations. Now this approach allows you to get a pinpointed POV on the segments that are most profitable, which ones just break even, and those that might not be performing well but have room for growth.
By identifying the factors that may be holding back profitability—like pricing issues or a lack of targeted marketing—companies can take action to boost their profit margins.
And as a proof of concept let’s take coca cola for example. They employ this strategy effectively by segmenting its customer base into various demographics and geographic regions. What they did is that they discovered that their premium beverages perform exceptionally well among health-conscious consumers in urban areas. So by tailoring marketing campaigns to these specific segments, Coca-Cola has seen a significant increase in sales of its healthier product lines, contributing to a 11% increase in overall revenue in 2023.
Evident enough, integrating segment profitability not only helps businesses identify where their most valuable customers are but also highlights opportunities for growth in less profitable segments. Now with this in mind, let’s explore the broader benefits of segment profitability management and how it can drive strategic decision-making across various aspects of a business.
By now we have a fair understanding of what segment profitability. But now let’s shift the focus to more customer centric segmentation. By narrowing down to target group as customer behaviour you start analysing customer groups basis of their purchasing patterns and profitability. By identifying this, companies can tailor their strategies to enhance overall profitability.
With this in mind, Let’s explore how this process works and its implications for sales, marketing, distribution, and product development.
Now we all understand that having an effective sales and marketing channels comes at the cost. And that cost according to Promotion Optimization Institute is 20% to over 27% of the revenue just spend of trade promotions.
But by combining trade promotion optimization with segment profitability in marketing strategy can significantly enhance the effectiveness of sales and marketing efforts. Let’s find out how:
1. Identifying High-value segments: At the heart of both TPO and segmentation profitability is the ability to identify and prioritize high-value customer segments. By analysing customer buying patterns and profitability metrics, sales teams can segment their accounts based on various criteria—such as revenue potential, purchasing behaviour, and service costs.
Once high-value segments are identified, TPO comes into play by optimizing promotional strategies tailored to these specific groups. By analysing historical data on past promotions—such as discount effectiveness or promotional timing—companies can refine their trade promotion strategies to maximize ROI.
2. Account segmentation: Now with research showing 10% increase in conversation rates with personalized marketing, the importance of segmentation profitability in marketing strategy is now more than ever. Hence, by categorizing customers based on attributes like revenue potential, buying behaviour, and industry type, businesses can adopt a targeted approach. This allows sales teams to focus on the most profitable segments, ensuring that marketing efforts align with customer needs.
3. Scoring and Ranking Accounts: Once you have a target group in mind, the next step is to focus sales in that direction. To do so, segmentation profitability backs organizations with relevant insights that helps them to score and rank accounts within each segment. This prioritization allows sales teams to allocate their time and resources efficiently.
By doing so, companies can categorize accounts into tiers based on their profitability potential—Tier 1 for high-value accounts, Tier 2 for medium-value, and Tier 3 for lower-value accounts. This structured approach ensures that sales teams concentrate on the most promising prospects.
Once all of this is done - Set quota objectives that are simple to explain and justify to the sales team and are based on an accurate and fair allocation of opportunities. Improvise marketing trends and delivery system for fast and easy access to the customers.
There is no doubt about the fact that studying segment profitability on a granular level can reveal many business opportunities. Organizations can identify different distribution channel offerings and approach for a better, faster, and cost-effective channel. Here’s how this process works:
Assessing Channel Performance: Analyze various offerings (e.g., products or services) sold through different distribution channels (e.g., online, retail, wholesale) to identify which channels generate the most profit. For example, evaluate offerings "X," "Y," and "Z" across channels "A," "B," and "C" to pinpoint performance discrepancies.
Understanding Profitability Drivers: Evaluate the factors contributing to profitability within each channel, such as pricing strategies, customer preferences, and operational efficiencies. If offering "X" excels in channel "A" but falters in channel "B," investigate reasons like pricing discrepancies or customer service challenges to inform strategic adjustments.
Cost-Effectiveness Analysis:
Analyze logistics costs, inventory management, and delivery times to find the most economical distribution channels for specific products. A comprehensive evaluation of costs and benefits can uncover chances to make operations more efficient and cut costs without compromising on service quality or improving it.
It’s time to uncover the hidden profits and boost your bottom line with pricing analytics.
Get InsightsNow clustering is a statistical strategy, helps in grouping similar items or individuals into distinct clusters, enabling a smooth segment profitability management process. Through the utilization of clustering methods on the data, companies can pinpoint particular groups that have the greatest impact on overall profitability, enabling more focused marketing strategies and allocation of resources.
Let’s understand this with an example. Let's consider a company that specializes in wearable items for various categories such as Men's, Women's, and Kids. Clothes, shoes, and watches will be available in every department, with specific sections for shirts, pants, ties, socks, and more.
By segmentation and clustering, the sales and profit from different segments can be derived. Now this will help in identifying the profitability of each product from the data and will compare with the other products for detailed analysis. The profit of each SKU can be separately identified and required changes can be made to increase profit. And that’s the power of having Segment profitability management.
And it’s not all words. Let’s look at some stats that proves that why companies have this on their ‘must-have’ list:
This is a journey—one that organizations embark on to creatively explore the full range of customer value sources. As you navigate this path, you'll gradually enhance your understanding of what drives profitability. This exciting process opens up new avenues for innovation in products and methods, providing fresh options for maximizing long-term customer value.
Just imagine the possibilities! By refining your strategies, you can create tailored solutions that truly resonate with your customers, not only strengthening loyalty but also driving growth in ways you might not have imagined!
But be mindful, this is not going to easy. But at the same time, you are not alone on this journey! We’re here to help you explore these opportunities.
At Polestar Solutions, Our team of experts is ready to guide you through this transformative process, ensuring you make the most of your customer data. So why wait? Get in touch with us today to book a session, and let’s start unlocking new levels of customer engagement and profitability together!
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Information Alchemist
Without data you are just another person , with an opinion.