This implementation is DEPRECATED, please refer now to Negotiation Guidance Accelerator.
The Segmentation-Optimization model is a standard Pricefx approach to price optimization for B2B businesses.
Concept
The idea behind it is very intuitive. When facing a new pricing event, you need to make a pricing decision. A sensible way to make this decision is to compare the situation with a similar one from the past. If you sold the same product to the same customer before, you usually wouldn’t want to go too far from the previous price. But the previous price could sometimes be suboptimal, either accidentally or even intentionally because of some special circumstances. You wouldn’t want to blindly follow this past price in the future. Or maybe you have never sold that product to the same customer before so you have nothing to compare to. In these cases, you would also want to check if you sold a similar product to that customer, or to a similar customer and consider that pricing too. That is where segmentation takes place, because it provides a richer comparison set than if we were just looking for the exact same situation in the past. It allows to explore more possibilities and avoids sticking with the same bad pricing that was used in the past.
Pricefx Solution
In our Segmentation-Optimization model, we build a segmentation tree using a pre-defined set of attributes called segmentation levels and then provide price recommendations based on the information from the whole segment. The segmentation levels are usually a combination of product attributes, customer attributes and even transaction attributes.
The fact that we build a segmentation tree instead of considering all the combinations of attributes is crucial. We only go into such depth where there is enough transactions to make an informed decision and also we do not have to consider lots of irrelevant attribute combinations. The segmentation levels are usually chosen manually to reflect both the past behavior and business experience and needs of our customer. Ideally, the segments should be consistent in a sense that most of the transactions within a segment should have similar pricing.
The goal of our price optimization is then to estimate the pricing potential of each segment and push the prices to higher values wherever possible.
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