On paper, pricing sounds simple enough. Take the cost of production, add your profit margin, and start selling/serving. The trick is to get your profits as high as possible without driving away customers. But if it's so simple, why do so many businesses struggle with pricing their products?
Of all the elements that can affect profit, pricing has the highest impact. To put it into perspective, a 1% improvement in price optimization can boost your total profits by 11.1%. To prevent you from leaving money on the table, let's dive into proper B2B pricing strategies and how to manage your prices to remain competitive and, more importantly, increase your company's profits.
In a survey of more than 1,700 companies, almost all executives interviewed stated that pricing was a high priority, yet for some reason, most companies spend less than ten hours per year working on their pricing strategy.
In the survey, companies considered to be top performers regularly excelled in three areas:
They tailor prices at the customer and product level
They align sales incentives with the pricing strategy for a balance of fixed and variable compensation
They provide their salesforce with the right data and tools to create effective pricing levels.
What do all these areas have in common? Flexibility. Top-performing companies take the time to analyze data and constantly update their pricing based on customer beliefs and market trends.
Prices should not be static! Pricing, especially for B2B businesses, is a dynamic process.
Managing your prices using a value-based approach requires intensive analytics about your customers' buying habits—and much more than ten hours' worth of work per year. The tricky part is that not all customers place the same value on your products. That means not only do you need to adjust prices regularly based on customer beliefs, but you'll also have to create price groups based on different customer personas.
To effectively manage your prices, you'll need a flexible, dynamic platform that can handle the constant updates in an efficient manner.
In the business world, you either keep up or get out of the way. Businesses that don't want to fall behind need to make their prices nimble to keep up with an ever-changing market. Dynamic pricing is the practice of setting flexible prices based on market demands. This includes changes in competitor pricing, market landscapes, customer beliefs, and even being able to set different price levels based on customer personas. The faster and more frequently you can adapt your pricing to changes in the market, the more competitive you'll become.
While it might seem strange to raise prices, especially above your competitors', if you use a dynamic pricing model along with a value-based pricing strategy, you can offer your company the largest profit margins. It's not uncommon for companies that use dynamic pricing to raise the prices of certain products by 60% without seeing a significant loss of sales.
One of the main differences between B2C and B2B sales is how you build a relationship with your customers. In the B2B landscape, a customer might actually be multiple buyers coming from a single company and has the potential to represent a large amount of revenue on a recurring basis. In the traditional B2B relationship, you're creating long-term value through personalization, high-level support, and expertise. You might offer different pricing for a consistent buyer compared to a customer who purchases only a few items per year.
With group-based pricing, you split your customers into categories based on defining sales qualities. For example, you can create price groups for special statuses like free shipping or tax-free buyers, or you can create groups based on business relationships. Whatever defining customer quality would affect pricing, create a group for it.
Group-based pricing allows you to dive deeper into your value-based strategy. Not only are you adjusting prices based on customer demand, you can adjust prices based on the demand of each type of customer. You can also build relationships with specific groups by offering unique promotions or discounts based on buying habits.
Keep in mind that you will want to envision a system where customers could be members of multiple price groups - each with its own pricing schema.
If you're manually managing the assignment of customers to price groups, you'll want to set a time table to review and update the membership. If a customer is a member of your “Best Customers” group, but hasn't shopped with you for over a year, it might be time to consider updating their profile.
Map your customer group structure and create the group criteria before making the program available for customers. Essentially, you'll be defining what the customers are going to receive as a benefit and how they qualify.
Ensure your customers are aware of the discounts they're receiving as part of their membership when shopping on the site. Consider at least displaying membership status when the user is logged into their account.
Creating a group based pricing program may be straight-forward, but how do you maintain the membership if there are specific qualifications to be flagged as a group member. Depending on the size of your customer list, you may want to export a spreadsheet and manually review or consult with your technical and development support teams to build an automated process.
Customizing prices at the product level is another way B2B businesses can use dynamic pricing to boost profits. Bundling related products for a price lower than the cost of the two items individually is a popular product-based pricing strategy used by many businesses in both the B2C and B2B arenas.
Product bundling can be effective, but it's important to do it correctly. If a product bundle is the only option—a scenario called “pure bundling”—it can actually hurt sales and put a bad taste in customers' mouths. Mixed bundling, where the customer has the option to bundle or purchase each product individually, has been shown to be very effective and can increase sales by over 20%.
Consider bundling a primary purchase (a machine, for example) with a set of supplies for 3 months or 6 months at a special rate. That way, you're increasing the sale amount and getting supplies into the hands of the customer.
If you're selling service contracts, training or warranties, considering combining them together with the main product at a discount
To encourage repeat business, think in terms of a B2C experience, what would your customers' reactions be if you included an electronic gift card for a return shopping visit?
Adjusting prices based on the quantity of items sold is another form of dynamic pricing. You can make more profit by selling to a massive wholesaler compared to a smaller business, so why not incentivize larger customers to stick around, or smaller customers to purchase more, by offering bulk discounts?
Quantity-based pricing can allow your company to sell more products and increase revenue, but it's important not to offer too deep discounts and hurt your own profits. Perform proper due diligence to determine the optimal discounts based on quantities sold.
Review minimum and maximum quantity levels by product type or category. Does it make sense from a merchandising perspective to allow a customer to buy a single quantity of a very low dollar product?
When the customer is shopping the site, are you correctly messaging the pricing level to that customer; in other words, are they aware of the discount before they add to cart?
Of course, we haven't reviewed more typical promotion and marketing approaches. Why not? Those promotions tend to be shorter term or have a limited set of rewards. However, that doesn't mean that promotions aren't an integral part of the B2B pricing strategy and mix especially when those promotions are combined with a price group combination.
Pricing should not be static!
Dynamic pricing sets flexible prices based on market demands such as customer beliefs, competitor prices, product relationships, landscape changes, and customer personas.
Companies that practice dynamic pricing have been known to increase prices on certain items by 60% without significant loss of sales.
One of the biggest hurdles many companies face when they implement a dynamic pricing model is the lack of flexibility in their pricing platform. Generally, people are lazy. If it takes too much time or effort to update prices, you'll make changes less often.
It's important to use a platform that can keep up with the volatility of the market and has the ability to support complex pricing. Choose a headless eCommerce platform to offer your company the freedom to update prices across all channels and keep up with demand.
Maintain your company's pricing to have the single greatest impact on profits. The key word is “maintain.” Pricing is not a static practice. By using a value-based pricing strategy along with a dynamic pricing model, you'll be able to maximize your profits and keep up with the ever-changing market. It might take a bit more work and data analysis, but it will pay off with higher profits.