March 2019

Segmentation for Differentiated Pricing

Strategies
A paradigm shift in catering to customer needs

PwC Pricing Insights Series - Detailed PoV

www.pwc.com
Strictly private and confidential
PwC’s Digital Services
Document Purpose

Goal

Target Audience
1 ● Provide insights into value based customer
segmentation and benefits
● Share PwC approach on performing value
based customer segmentation

2
PwC client service teams who will use this
document as part of sales collateral for pursuits

Target market for the offering is companies that

are looking to modify their customer
segmentation to impact offering structure and
pricing strategy To be used to answer following

3
questions which clients ask:
● What are the benefits of shifting to value
based customer segmentation?
● How should the company define and
prioritize customer segments?
● What are the key steps in performing value
based segmentation?
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 Segmentation for Differentiated Pricing Strategies PoV describes value based
customer segmentation and PwC’s approach to value based segmentation
What this Point of View is...
● A set of macro-level guiding principles used to
define the approach to customer segmentation
● A document highlighting the need for
businesses to transition to value-based
customer segmentation from traditional
segmentation methods
● A set of guidelines on the approach to
value-based customer segmentation which
includes identifying strategic and business
priorities, analyzing and profiling customers
and prioritizing segments. This informs
downstream pricing actions
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x What this Point of View is not...
● A document that provides quantitative/
analytical techniques and methods for
customer segmentation
● A tool to define and prioritize customer
segments based on certain key criteria
● A set of guidelines on various methods of
traditional segmentation approaches that do
not consider customers’ willingness to pay
and company’s cost to serve those segments
3
Document Overview

Table of Contents

1. Customer Segmentation Overview

2. Value-Based Customer Segmentation

3. How PwC can help

4. Case Studies

5. Contacts

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 Customer Segmentation Overview

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 Challenges faced by most firms which indicate a PwC’s recommends transitioning
potential Value Based Segmentation opportunity... to Value Based Customer
Segmentation and Pricing since...

Leadership struggles with low customer adoption and/or Value based Segmentation can help
declining market share driven by poor customer satisfaction serve 80% of the
scores
customers by setting price
targets based on willingness to pay
BU Leads face risk of leaving money on the table by using single
price point across segments while dealing with sophisticated
needs of target customer segments Shifting to a pricing model based on
customer willingness to pay can
often generate between 1% - 3% of
Pricing team has incomplete understanding of willingness to pay incremental revenue
and cost to serve various customer segments, leading to loss of
revenue
It results in lower cost to
serve by targeting the right
Sales and Sales Ops struggle with churn and dip in renewals due
customers with right products at
to incomplete understanding of customer segments evolving
right price points
needs
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Customer segmentation is about identifying groups of customers with
homogeneous needs and similar buying behaviors

Customer Segmentation is...

1 How can we
cluster customers? 2 Which attributes
are relevant? 3 How will we
differentiate our
offering?

… the process of … based on various ...to understand the

dividing customers attributes... needs of the customers
into segments with and build
similar needs, differentiated
dynamics and buying pricing strategies
processes…

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Effective customer segmentation can help in pricing and promotional analysis,
geographic strategy, and better customer experience

Segment Position Tailor Proposition Implement

Identify customer Evaluate and Define and prioritize Selectively Build and
attributes and position segments actions per segment Deliver
dependent variables. vs. market based on customer Differentiated
Define segments post behaviour drivers Strategies
correlation analysis
1 2 3 4

Segmentation Sample Use Cases

Pricing Promotional Geographic Customer Customer

Strategy Analysis Strategy Retention Experience
Customized offering Marketing strategy Sales and pricing Focus on customer Tailor customer
structure to match the tailored to segments strategies to manage lifecycle to experience as per
customer preferences instead of one strategy global regional implement tailored segment-specific
at point of sale for all customers pricing, tailor offering preventive measures needs
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Traditional segmentation approach leads to lost margins and lost business

Traditional segmentation approaches may not capture Catering to customer needs has a direct bearing on
customer motivation to pay higher/lower prices operational cost to serve, and this impacts profitability

Increasing profitability requires tailoring offering and setting price based on perceived value across segments

Traditional segmentation and using one size fits all Managing price along segments aligns
approach leads to lost margins and lost business value with price
Willingness to Pay Willingness to Pay

Lost Margin

Segment-specific Price Targets

Single Price Target

Lost business

Cost Cost
Segments
(width = volume) Segments
(width = volume)
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Value based segmentation enables companies to provide differentiated product
and/or service offerings tailored to specific customer needs

Segmenting customers into groups based on insights into their purchasing behaviour helps organizations to target customers with the
right product and/or service offering at the right price point

Moving From Moving To

Differentiate products and services,

customer programs, marketing tactics
Demographic Psychographic

Understand how
Behavioural Geographic customers differ from Value-based Develop business cases
each other and how to Segmentation based on multiple
serve different information sources
segments
Firmographic

Establish linkage and direct measures

into tactical execution plans

Traditional segmentation approach A value-based approach to segmentation incorporates cost to serve

focuses narrowly on customer needs customer needs, and directly impacts profitability
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 Value-Based Customer Segmentation

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Value-based customer segmentation can lead to higher profitability and better
customer retention

Value-based segmentation involves segmenting customers based on their needs and buying behaviour by considering their
willingness to pay for perceived value delivered by offering and cost incurred by company to serve them
2. Analyze and Profile
1 Customers to create
Segments

Value-based
1. Identify Strategic and
Segmentation
Business Priorities
Approach
3 2

3. Prioritize Segments

Benefits

Increased Higher customer Higher returns on Increased customer Higher predictability of

profitability retention rates marketing investments wallet share revenue and offering

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 1. Identify Strategic and
Business Outcomes

Identifying strategic and business priorities helps define criteria for segmentation

Based on strategic outcomes and business outcomes identified, key guiding principles should be used to define drivers that maintain or
increase EBIT, improve customer satisfaction, increase renewals etc.
Segmentation criteria may vary depending on
Market Analysis Key Guiding the industry, business model, and nature of
Principles offering

Competitive Analysis • Margin • Cost to serve

Ex.: Improve market
Pricing
relevance, increase • Customer satisfaction • Cost of sale
Strategy
customer traction, • Propensity to Churn • Share of Wallet
Company Analysis improve user value/
retention • Customer experience • Channel selection
Offering Use
Structure Cases • Tenure / Conversion • Wholesale contribution

Representative Inputs Key Questions to be Answered

EBIT Financial Drivers
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Financial Scenario Models
• Which financial drivers are aligned to the strategic priorities of the firm?
• Which interaction opportunities have the greatest impact on customer
value?
• Where are the key growth opportunities which can be influenced by
customer experience?
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 2. Analyze and Profile
Customers to create Segments

Analyzing propensity and profiling customers provides a methodology to set

segmentation parameters based on behavioural traits, and to identify the right segments

Identify buying Develop segments Align segments to Integrate with Map profiles to
Identify addressable target
behaviour based on buying channels and competitive and channel and
market and value group
attributes differences/ similarities develop cost profiles consumer research offering structure

Developing propensity profiles helps analyze customer segments, and identify conversion/ retention opportunity
• Propensity to Pay • Propensity to Re-Contract • Propensity to Recommend • Propensity to Bundle/ Cross-Sell/
• Propensity to Churn • Propensity to Buy • Propensity to Stay post Incident Up-Sell

Representative Inputs Key Questions to be Answered

Propensity Analysis • What is the maximum amount that customers are willing to pay for the offering?
• Which customers have similar buying behavior?
• What expectation do customers have from customer service, sales and channel
experience?
• Which customers are to be classified as at-risk and why?
• What are the average contract or re-contract terms?
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 3. Prioritize Segments

Analysis of the estimated value contribution allows for prioritizing the segments

Segment Value Identify upper and lower

Identify value groups thresholds of customer Define value band for Align value bands or assign
Analysis lifetime value customer lifetime value specific value to customers

Touch-point Identify cost drivers linked Identify current state cost Identify alternate low-cost/ Identify impact of channel
Analysis to segments baseline for each touch-point low-touch channels realignment

Representative Inputs Key Questions to be Answered

Customer Lifetime Value Analysis and Scenarios
Touch-point Analysis
Touch-point analysis
Link Propensity Impact and Cost analysis
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• Does the metric we have developed strike a balance between costs, revenue, tenure and
wallet share? Are these values forward looking and adequately account for costs?
• Based on our knowledge of customer lifetime value scenarios, which business initiatives
should be prioritized?
• What are the key drivers of value at each lifecycle stage (Ex.: Bundling)?
• What are the touch-points across marketing, sales, delivery and service?
• Which are the key behavioral drivers of touch-points (such as speed, skill, human touch,
self service etc.)?
• What are the costs and are there any alternative touch points for channel realignment?
• How does each touch-point impact customer value and behavior?
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Value-based segmentation helps define segment-specific pricing which increases
revenue and profitability, while delivering a customized customer experience
Value-based Customer Segmentation Pricing Guidelines based on Segmentation
Product A
Segment 1

Willingness to Pay Price band

Segment 2

1 2 3 4 5 Segments
(width = volume)

Segment 3 Product B

Segment 5 Willingness to Pay Price band

Segment 4

Willingness to Pay for all target segments is 1 2 3 4 5 Segments

greater than the cost (width = volume)
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 How PwC can help

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Typical value based segmentation related engagement delivery process

The purpose of segmentation is to define a set of actionable segments that have enough differentiation in characteristics to enable
companies to monetize on the customers’ willingness to pay, while delivering a more customized experience to customers

Select Customer Define Conduct Refine Segments

Develop Price
Segmentation Willingness to Segmentation through
Guideline
Attributes Pay Metric Analysis Business Lens

• Identify customer • Define metrics that • Define analytic • Simplify sub-segments • Generate customer
needs will be used to assess approach as needed price based on
willingness-to-pay willingness-to-pay
• Identify customer • Assess product needs • Incorporate business
attributes that drive • Calculate metric using by segment rules to account for • Identify deal attributes
willingness-to-pay available data small customers and generate deal level
• Leverage exploratory
and/or product rules pricing
• Identify data source analysis from previous
for each attribute step to select • Profile segments from • Provide tool to
segmentation the final segmentation calculate deal
• Build master data
variables; perform solution; create guidelines for “best in
used for analysis
segmentation profiling cards for each class”, “target”, “floor”
segment

Based on outcomes of the value-based segmentation process, PwC can further assist companies in developing Offering Structure and
pricing guidelines in areas of Value-based Pricing, Pricing for XaaS Solutions and Solution Pricing.
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 Case Studies

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Case Studies

1. Intelligent pricing guidelines based on customer segmentation model driven by willingness to pay
and product profiling analysis
2. Enterprise pricing strategy based on guiding principles driven by customer segmentation
3. Customer Profitability Analysis for deals
4. Customer portal monetization to increase customer engagement through segmentation

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Case Study #1: Intelligent pricing guidelines based on customer segmentation
model driven by willingness to pay and product profiling analysis

Client problem • The client wanted to modify their customer segmentation approach across three geographies and Illustrative outputs
PwC recommended adopting a value-based customer segmentation approach
Customer Segmentation Model
• The client wanted a digital solution that would facilitate collaboration between the pricing strategy
team, sales operations and sales teams while managing deals
• In order to address the issue, PwC developed intelligent pricing guidelines for selected product set
through product profile analysis
Solution • PwC developed 46 customer segments spanning all geographies, and ranked segments from lowest
to highest willingness to pay
• Key segmentation attributes were identified based on drivers that impact difference in willingness to
pay. These attributes were then mapped to each geography.
• Product profile analysis was performed to determine each segment’s willingness to pay for each Intelligent Pricing Guidelines
product category
• PwC provided guideposts for four pricing zones based on Best in Class, Target and Floor prices.
• The Target Price Guidelines App was leveraged to provide deal level guidelines based on product
level details
• The Target Price Guidelines App was deployed in AWS Cloud, and access was provided to pricing
strategists, sales operations and sales teams. PwC also identified key requirements for the
deployment
Results With the help of PwC team's efforts, the client was able to:
Business Requirements Documentation
• Leverage value-based segmentation approach and define key attributes that impact the differential
values in willingness to pay across segments
• Document business requirements needed to institutionalize intelligent pricing guidelines in existing
systems
• Define pricing strategy based on willingness to pay and optimize guidelines using deal attributes
• Deploy cloud-based solution to provide deal level guidelines based on product level details to assist
pricing strategists, sales operations and sales teams

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Case Study #2: Enterprise pricing strategy based on guiding principles driven by
customer segmentation

Client problem • The client wanted PwC to review and modify the enterprise pricing strategy and offering structure in Illustrative outputs
order to maintain a competitive edge, and explore new avenues for growth
Guiding Principles
• PwC addressed client requirements by performing market analysis, competitive analysis and
internal review of the client’s offerings, current pricing model and use cases
Solution • PwC performed market analysis and identified opportunities in the financial service industry for the
client. Leading players in the industry were identified.
• Competitive analysis was carried out and differences between the client and leading competitor in
offering structure, pricing and go-to-market models were identified
• The client’s offering structure, pricing and use cases were evaluated and top priority markets were
identified based on industry need and product fit
• Based on the pricing strategy, PwC developed key guiding principles, mapped customer lifecycle Offering Structure
phases to each principle and defined route-to-market
• Modifications to the offering structure were recommended based on use cases identified, in line with
guiding principles
• Identified potential pricing models
Results With the help of PwC team's efforts, the client was able to:
• Prioritize market focus, and drive specific products and offerings for the financial services industry
through differentiation
• Drive greater customer adoption and initial revenue
Segment-focused Pricing Strategy
• Suitably modify the offering structure based on use cases to address the need for rapid market
adoption and target differentiated customer needs in order to maximize revenue across all segments
• Define pricing model to balance strategic market adoption goals, revenue needs and metering
viability

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Case Study #3: Customer Profitability Analysis for deals

Client problem • The client wanted PwC to identify deal levers that would act as optimization parameters and Illustrative outputs
constraints to maximize profitability across all segments and reach the effective frontier
Vendor Grouping
• PwC performed gross margin analysis, data-driven segmentation and micro-profiling, win rate
analysis and volume prediction analysis
Solution • PwC identified an addressable market size of $40 million that can improve with data-driven pricing
strategy for the client
• Gross margin analysis was performed and factors impacting buy side margin and sell side margin
were identified
• Data-driven segmentation was conducted to deliver customized pricing recommendations for the
client. This included baseline segmentation and micro segmentation
• PwC performed vendor grouping by considering various vendor attributes for buy side margin Data-driven Pricing Segmentation
analysis
• Micro profiles were created for targeted tactics, with relative price index determining the willingness
to pay
• Win rate analysis helped understand win rate probability for different segments to optimize RFP
success rates
• Volume prediction analysis was carried out to estimate expected win rate and projected deal value
Results With the help of PwC team's efforts, the client was able to:
• Perform data-driven segmentation and vendor grouping
Volume Prediction Analysis
• Identify components impacting buy side margin and sell side margin
• Estimate win rate and projected deal value
• Determine deal KPIs

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Case Study #4: Customer portal monetization to increase customer engagement
through segmentation

Client problem • A large cable company wanted to improve its digital strategy Illustrative outputs
• The client lacked web analytics expertise required to drive actionable insights for its web-site
Pricing Strategy through Segmentation
• The client wanted to understand how to better engage with the existing population and estimate the
size of the addressable market would be if the client opened the site to non-high speed internet
subscribers (cable and phone only) in its footprint, and amount of actionable changes the client
could make in the short term to result in uplift with new and existing users

Solution PwC partnered with leading web analytics and segmentation companies, to analyze website visitors and
traffic to:
• Determined how visitor engagement is correlated with product holdings and tenure
• Identified high-opportunity customer segments, using in-house and third-party segmentation Execution Plan
schemes
• Compared visitor distribution to the major web portals
• Determined the connection between interactive tools (eg, email) and longer subscriber tenure
• Determined most-viewed and most-desired content

Results With the help of PwC team's efforts, the client was able to:
• Help client better understand the nature and interests of its visitor base
• Allow to more clearly communicate its visitor characteristics with advertisers and command higher
advertising prices
• Establish a process to link various data sets to create a customer view of website activity that can be
leveraged for future analysis

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 Contacts

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Contacts

PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP

488 Almaden Blvd 1 N Upper Wacker Dr.
Suite 1800 Chicago, IL 60606
San Jose, CA 95110 M: +1 315-480-6430
M: +1 510-427-7578 colin.carroll@pwc.com
amit.dhir@pwc.com

Amit Dhir Colin Carroll

Principal Principal
Advisory Advisory

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