Analysis has shown that a 1% increase in realized price brings an 8% improvement in operating profit, whilst a 1% improvement in market share or variable costs brings about only 4%. This makes it clear that the beliefs against changes in pricing should be overcome, else money is left on the table and the door is open for competitors who understand the power of pricing.
Achieving better B2B pricing could be hindered even before starting by five beliefs which can be ingrained in many companies:
1. The products are commoditized, so we must accept prevailing prices in the market
Commoditization can be primarily avoided by shifting discussion to added value through services, delivery terms or any other kind of differentiated aspects of the offering.
Even on markets where most products can’t be priced higher than the standard market price there can be found pricing opportunities within certain customers or SKU in portfolio where price is less of a factor.
2. We can’t respond effectively against new, disruptive business models—much less figure out if we should be the disruptor—without jeopardizing our core business
One good disruption model is pricing that evolves based on customer needs and priorities. More B2B companies are starting to use pricing that incorporates a share of the value they give to the customer. That could be jet engines priced per mile or copiers priced per printed page. The difficulty in applying this type of strategy is that current output price meters sometimes don’t reflect the current way in which customers want to buy today, the value provided to customers or the costs of providing the goods or services.
To overcome these setbacks the key is focusing on the customer needs and priorities beyond the product-centric view.
3. Can’t constrain negotiations without killing the ability of our salesforce to close deals
In many present cases incentives for sales agents focus on encourage driving higher volumes at the same time overlooking margin.
Salesforce should be equipped with business intelligence tools to enable smart pricing decisions. Statistical guidance based on deal specifics to be preferred compared to ad-hoc discounting.
Disciplined discounting based on a standardized, fast process of approval is another step in countering this issue.
4. Need to maintain legacy channel discounts even though these create complexity and obscure our view of profitability
Discount programs are a strong incentive for the wholesalers and other channel distributors. But in many cases the use of many discount schemes can lead even to negative margins.
In this kind of cases focus must be kept on high-impact programs and at the same time ensure that the programs remaining are consistent as to allow partners to be up to date with the requirements needed to qualify for them
5. List prices don’t matter, we get to the right price points through nonstandard discounts
In some cases, this can be an obvious problem, as buyers can conduct a previous screening where to rule out high list prices. List price serves as an anchor that should correspond to how the customer views the product and the market in its whole.
To control all the points from being again problems to the pricing process, there is a need to have designated persons / departments in charge of pricing. Ownership and accountability are key to keeping pricing in line across departments or product lines.
About The Author: Radu Marin
Radu is a former Pricing Manager at HP and is now actively working in our pricing projects as a Pricing Analyst and contributes to Price Edge marketing efforts when possible.
More posts by Radu Marin