The Value of BTL/CVM Pricing

BTL (Below-the-line), or CVM (Customer Value Management), or Segmented Pricing are all buzzwords that almost all business people heard about, but…

What is the real value of CVM/BTL Pricing for the business?

I will demonstrate it through a simplified example, so keep in mind that there are many different ways of applying it and this is just an example of a Business to Consumer model which also has above-the-line/open market offers.

So, let’s consider in this example an online retail store.

In this model the ATL (Above-the-line) price is the one presented to all unidentified customers that are surfing the webpages of the online retail store looking for great deals.

The ATL price tend to be aligned with the Demand and Supply curves intersection (Price vs. Quantity), since it is the market equilibrium point.

 Note – Usually the cost per unit sold tend to decrease with incremental quantity, but for the sake of simplicity of this model example, that cost will be stable.

Although the online business is extracting relevant profit with the ATL proposition, as you can see in the graphic above, the company is not maximizing their overall profit and revenue potential.

How to improve business efficiency and extract more revenue and profit from the market?

The business efficiency can be improved through Customer Value Management (CVM), where it can be developed Segmentation Analysis, Targeted Marketing and also Targeted Pricing, communicating tailored offers to those customers through Below-the-line channels, where only selected customers will be exposed to personalized discounted offers.

The company through CVM efficiency improvement will now have multiple supply curves to address different segments that were not willing to pay the ATL price.

So, BTL discounted offers managed through Targeted Marketing, Targeted Pricing and Targeted Communication will generate incremental revenue and incremental profit, since the customers engaged with the online store will increase, generating more sales.

In this example of the online store, how it can be implemented?

• The first step will be always through data analysis; in this example the online store may explore different data sources. Examples: The customer's accounts details in the store, their previous purchase records, or the website cookies that track the pages that the customer visited without buying the items, and others.
• From the data analysis previously described, the online store may now identify different customer segments and deliver to them personalized product/price proposals with the support of revenue/margin optimization models.
• And finally, the tailored offer must be communicated to the customer through a BTL channel (example: newsletter) so it may be promoted individually as an exclusive promotion only valid for that customer.

Following this approach, the online store can now explore new segments that before were out of reach from the ATL proposition, since although they had interest in the product, they were not willing to pay the ATL price and as shown in the graph below, the company will be able to increase their revenue and profit.

The Risk and Challenge…

… It is critical to avoid impacting customers that were willing to pay the ATL price with the BTL discounted prices.

If the segmentation analysis and/or execution are not properly executed, there is a high risk of cannibalization of the ATL revenue by the BTL discounted propositions, therefore leading to revenue erosion, instead of revenue growth as intended.

Keep in mind that proper Customer Value Management through BTL Segmentation and BTL Pricing require a lot of resources, but also don´t forget that the revenue and profit growth opportunities through BTL are also huge.

Note that Customer Value Management (CVM) is not only about BTL discounted offers and this case is just a basic example of how CVM can bring incremental value to a company.

Smart Pricing – The Next Generation

Smart Pricing is a Pricing Strategy that can be implemented in many different industries and combines the following:

• Profitability - Design an offer/promotion/service/product which is profitable. 
• Relevancy - Identify the customer’s profile that may consider the offer relevant. 
• Segmentation – Push the proposition only to the customer’s segment that the offer will be relevant and profitable.
• Timing – Identify the trigger event that has associated a higher probability of the offer adoption and push/promote the offer at that moment.

“Smart Pricing" sounds only as another marketing buzzword… not true.

So, it is easier to visualize the Smart Pricing concept through an example:

"Imagine a coffee shop that through a loyalty card tracks the orders of their customers.

From that, the coffee shop knows that a specific regular customer always order one medium size coffee and never orders any food.

Additionally, in this example there are the assumptions that the difference between a medium and a large coffee is only $1 and the coffee margin is high, and without a sale cannibalization, a discount of 75% on the coffee upgrade it still be profitable.

So, next time that specific customer checks in with the loyalty card, the shop assistant would be notified in the machine that the customer is eligible for a special promotion that day – he can upgrade is coffee to large only for 25 cents, instead of paying the normal price of $1.

If the customer doesn´t adopt the promotion, the shop probably still gets the usual medium size coffee sale… but if the customer bites it, there is a short term positive revenue and margin impact and from the product seeding there is a relevant probability of behavior change on the customer, if he starts ordering in the future a large coffee instead of a medium, even without a discount."

The Smart Pricing drivers on this example were:

• Profitability – The discount on the coffee upgrade is still profitable.
• Relevancy – The targeted customer already orders regularly a coffee, so the promotion is on top of what the customer is looking for. 
• Segmentation – Only customers that regularly order a medium coffee would be eligible and would be presented with this promotion.
• Timing – By proposing this deal when the customer is already buying one coffee in the shop increases the probability of the customer taking up the promotion, instead of sending him this promotion through a newsletter by email.

The Smart Pricing strategy is an effective way to increase revenues, profits and also customer satisfaction, engagement and loyalty.