What Is Profit Segmentation?
Many companies focused on increasing profits concentrate on increasing the number of products sold or the price of the products or services sold. Others focus on decreasing variable and fixed expenses. However, more companies are finding that doing deeper analysis into the profitability of products and services by customer or product line, then using that information to make changes, yields greater profitability. This process is called profit segmentation.
Small-business owners often focus on providing a decent product or service at a low price. In addition, many owners deliver a number of products and services to a broad customer base. Both activities are done in an effort to earn as much revenue as possible. However, such behavior can actually result in lower revenues and reduced profitability. It is not possible to make all of your customers happy all of the time, nor it is possible to provide good products to serve all the needs in your category.
The traditional approach for businesses has been to focus on changing the product or service mix to heighten profitability. Profit segmentation based on products or services involves examining what products sell the most and comparing them to the products that generate the highest margins. If your best-selling products are the most profitable, then you can produce more products that fit that criteria or find additional sales channels through which you can provide your products.
You may have some lower-margin products that are high sellers and some high-margin products that are low sellers. To increase your profits, you may opt to sell the lower-margin products online or in bulk to reduce the administrative expenses associated with these and increase your profits. For the high-margin products, you may opt to add services and account support or do more marketing to attract more discerning customers.
Since your customers are not all equal in terms of their contribution to the bottom line, not all of them need be a priority. Customers that complain until they get the lowest price and who require a lot of hand-holding or customer service support may actually be unprofitable. You can segment your customers into categories and offer them different products, pricing and service levels based on a number of factors. Factors include your customers' current profitability, potential increase in profits and overall importance. All of this constitutes profit segmentation.
If you are a plumbing supply company, you may offer products for sale in a retail location for the average handyman or plumber who wants to keep his costs low. For plumbing contractors who do kitchen and bath renovations, you may provide a separate showroom in which you sell higher-end products and consultations for which you charge a fee. For home builders and commercial contractors, you may provide a catalog and delivery service at yet another pricing point and service level.